The Chart of Accounts:
Everything an Entrepreneur Should Know
When it comes to running a successful business, effective financial management is key, as it ensures a business can meet its immediate obligations, sustain its operations, and capitalise on growth opportunities as soon as they’re available.
But good financial management will only be possible if entrepreneurs can capably perform essential financial management tasks, like keeping accurate records of their business, monitoring their cash flow, creating sound budgets, and planning sufficiently for the future. These activities are also integral in helping entrepreneurs make the smartest possible decisions and identify any potential issues that might get in the way of their financial stability.
And while no entrepreneur can be expected to be a mathematical genius on top of having good business sense, they must at least be familiar with fundamental accounting and bookkeeping concepts that support their different financial management activities. One such concept is the chart of accounts, or COA. The COA provides a structured framework for categorising all financial transactions, and a dedicated accounting solution - administered by an experienced accountant - may do a lot to help entrepreneurs organise, track, and analyse their financial data effectively.
In this article, let’s explore what a chart of accounts is, why entrepreneurs need it, and how to set one up with the guidance of an accountant.
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To begin, a chart of accounts is a systematic listing of all the accounts a business uses to record financial transactions. Each account in the chart is assigned a unique number to facilitate easy identification and organisation. The COA also serves as the backbone of a company’s accounting system by providing a structured framework for classifying all of its financial transactions.
Throughout the decades, the concept of a chart of accounts has evolved thanks to the advancement of industry-accepted accounting practices. Initially, businesses relied on manual bookkeeping to keep COAs, but with the advent of digital accounting software, it’s become easier than ever to access and maintain a COA.
It won’t be as easy to interpret the data on a COA and to make financial decisions based on the chart without the help of an experienced accountant. An entrepreneur would do well to enlist the help of accountants who are familiar with local accounting standards and regulations and who can explain the particulars that go into a COA. In the Central Otago region of New Zealand, for example, an entrepreneur should look for accountants Dunedin businesses trust to help keep their finances on track.
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A chart of accounts is indispensable for any business owner, as it supports organisational efficiency by systematically organising financial information. With a well-structured COA that facilitates proper financial reporting and analysis, businesses can easily generate financial statements such as the balance sheet, income statement, and cash flow statement without issue. Without these reports on hand, it won’t be as easy for a business owner like you to gauge the financial health of your business and make the most responsive financial decisions.
In addition, a COA is instrumental when it comes to the business’s budgeting and forecasting. If accounts are categorised clearly, it will be easier to track expenses and revenues and make accurate conclusions about the business’s cash flow and revenue potential. You should be able to refer to your COA to plan your budget, monitor your spending, and forecast your future financial performance.
Lastly, compliance with accounting standards and regulations is another significant benefit that an entrepreneur can gain thanks to mastery over their chart of accounts. A well-maintained COA will help a business avoid legal issues and penalties, as long as entrepreneurs and their partner accountants keep in mind that different industries and regions can have specific accounting requirements that the business must adhere to.
In Dunedin, accounting standards and regulations on the chart of accounts are primarily guided by the Generally Accepted Accounting Practice and specific requirements set by the New Zealand Financial Reporting Standards (NZFRS). While certain details may vary by industry and business size, the NZFRS outlines general principles for the structure of the chart of accounts. This typically includes main categories such as assets, liabilities, equity, revenue, and expenses, with further subdivisions to reflect specific business operations.
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When it comes to setting up a COA, the process involves several steps to ensure the business’s financial data is organised, accurate, and easily accessible. First, entrepreneurs must choose reliable accounting software to use to put the chart together. You’ll do well to select a software that suits your business needs and allows for customisation.
Opt for a tool that promises a user-friendly interface and robust features for managing accounts. You may also want to seek the assistance of your accountant to find the most suitable option or to manoeuvre the solution for you if you don’t want to expend time and money onboarding it to your workflow.
After selecting your accounting software, the next step is to customise your COA to reflect specific activities and the financial structure of the business. This involves tailoring the account names and numbers to match your business operations. Typically, accounts are numbered in blocks, with each block representing a main category, like so:
Within these blocks, specific numbers can be assigned to sub-accounts to provide more detail. For instance, cash might be 1010 under assets, while rent can be 5010 under expenses.
Once the COA has been set up, you and your accountant must regularly maintain and update it. This ensures the COA remains relevant and accurate to your operations. Remember, too, that you’ll need to add new accounts and modify existing ones as the business grows and evolves. If a new product line is introduced, new revenue and expense accounts specific to that product need to be created.
Finally, to identify any necessary changes, you must schedule regular reviews of your COA with your accountant. This will ensure that your financial data accurately reflects your current business activities.
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As demonstrated above, a well-kept chart of accounts is critical in the effective financial management of your business. Aside from providing you with a structured record of all your financial transitions, your COA will serve as a reliable tool for the sharp financial analysis that anchors good financial decision-making.
Take the time to understand and maintain a robust COA for your business. If you need further assistance, consult a professional accountant for valuable insights and tips on setting this system up. You won’t regret investing your time and effort into learning about COAs and other financial housekeeping practices that will ultimately improve the way you do business.
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