What’s a Chart of Accounts, and Does Your Small Business Actually Need One?
If you’re running a small business, you’ve probably heard the term “Chart of Accounts” (COA) tossed around by your accountant or seen it in a financial software like QuickBooks Online. But what exactly is it, and why should you care?
What Is a Chart of Accounts?
At its core, a Chart of Accounts is a list of all the financial accounts your business uses to track transactions. Just like a nebula's gravity pulls together the matter of a soon-to-be star into distinct patterns, the COA organizes financial data into clear categories. Without it, your numbers can quickly get chaotic.
These are the main categories you'll find in a typical COA:
Assets - Amounts owned, like cash and property.
Liabilities - Amounts owed, like accounts payable and loans.
Equity - Amounts invested in the business, like owner’s contributions.
Income - Amounts earned, like revenue and interest income.
Expenses - Amounts spent, like office supplies and contract labor.
When you first set up your company file in QuickBooks Online or similar software, a default COA will automatically fill in with a few general accounts in each of these categories. But is that enough?
Why Do You Need a Detailed Chart of Accounts?
You might be wondering, "Why bother setting up a detailed COA? Aren’t the default accounts enough for now?"
The short answer: It’s so worth it to start now! Setting up a well-structured COA from the start can save you a lot of time and stress down the road.
1. It Keeps Your Finances Organized
A good COA helps you track exactly where your money is coming from and going to. Say you buy some furniture for your office or waiting room, and you quickly categorize the purchase into one of the default accounts: Uncategorized Asset. At the end of the year, you or your tax accountant will be looking at a balance sheet with a large balance in that account and may not even remember what all was in there! Having specific accounts makes everything easier to manage.
Here are some other examples:
Default Account: Uncategorized Asset
Company-Specific Account: Office Furniture
Default Account: Opening Balance Equity
Company-Specific Account: Owner’s Contributions - John Smith
Default Account: Uncategorized Income
Company-Specific Account: Interest Income - Tax-exempt
2. It Helps You Make Smarter Business Decisions
When your accounts are well-organized, generating financial reports like a Profit & Loss Statement or Balance Sheet becomes much more functional. A powerful way to use these reports is through year-over-year comparisons. With the right setup, you can quickly assess whether sales have increased since this time last year and analyze other changes. However, revamping your COA in the far-off future could make these comparisons difficult. Comparing new revenue accounts to old, catch-all categories like "Uncategorized Income" might obscure meaningful trends.
3. It Makes Tax Time Less Stressful
A precise and detailed COA reduces stress at tax time by keeping your financial records organized and easy to navigate. Clear categories for income, expenses, and deductions allow your tax accountant to quickly find needed information and avoid the last-minute scramble to re-classify expenses or gather missing documentation. Your accountant or tax professional will thank you for a clean, well-organized COA.
Should You Hire a Bookkeeper to Set Up Your COA?
Hiring a bookkeeper to set up your COA can be a smart move, especially if your business is growing or you're not sure where to start. A pro can customize your COA to fit your specific business needs, ensure everything is properly categorized, and create a structure that aligns with your tax and financial reporting requirements. If you're not confident in setting it up yourself or lack the time to do it right, a bookkeeper’s expertise can provide peace of mind.
Need a Chart of Accounts Template for Your Business?
If you’re ready to set up your own customized COA, check out this live template I’ve put together for consulting and other service businesses. (No email needed!) You can easily import it directly into your QuickBooks Online account by following these steps: Transactions > Chart of Accounts > Click the arrow next to "New" > Import > Select Google Sheet. This template will help you hit the ground running so you can focus on growing your business!
Click here to view or import the Chart of Accounts template.
TL; DR
A well-organized Chart of Accounts is a game-changer for any small business. It helps you stay on top of your finances, make better business decisions, and keeps things running smoothly—especially at tax time. Whether you use QuickBooks Online or another tool, taking the time to set up and customize your COA will save you time, stress, and headaches down the line.
Ready to get organized? Grab your free Chart of Accounts template or reach out with any questions!