Classifying transactions is a significant aspect of the bookkeeping field. Bookkeepers excel at comprehending the connections between financial statements and assigning transactions to the correct categories. The chart of accounts is the primary list that bookkeepers maintain for every small business.
A chart of accounts (COA) is an extensive inventory of all the accounts present in a company's general ledger, categorized accordingly. This essential tool aids in structuring a company's financial operations throughout an accounting period and establishes guidelines for documenting transactions in the ledger. Every account listed in the chart of accounts serves a distinct function and is classified under assets, liabilities, equity, income, and expenses. Similar to words in a dictionary, each account comes with specific definitions. The key is to grasp the fundamentals of bookkeeping in order to interpret these definitions accurately. In many ways, it resembles deciphering a bookkeeper's dictionary written in a foreign language.
In every business transaction, a minimum of 2 accounts, commonly known as debits and credits, must be utilized, and the transaction must be reconciled. Put simply, debits need to match credits to ensure the books remain balanced. This fundamental principle is essential in bookkeeping, acting as the universal language of all businesses.
The significant variations among industries and companies within the same industry may not be immediately obvious. For instance, consider two landscaping companies. Company A is a small business owned by an individual that specializes in residential mowing. On the other hand, Company B is a larger enterprise with multiple equipment and staff, offering a wide range of services such as mulching, shrub and flower maintenance, and irrigation. Despite operating in the same industry, these two companies will have distinct chart of accounts based on the specific needs dictated by their respective businesses.
Proficient bookkeepers grasp these subtleties and will create a personalized chart of accounts for every client. Although a basic search online may provide a generic chart of accounts for lawn care businesses, bookkeepers recognize that the most precise approach to setting up a chart of accounts is by engaging in a series of consultations with the business owner to gain a thorough understanding of their specific business needs.
It is crucial to establish the chart of accounts accurately, as bookkeepers must grasp its significance within the broader context. A flawed or inadequate chart of accounts will result in inaccurate or incomplete financial statements, which are essential for making informed decisions in any small business.
If business owners do not have a background in bookkeeping, it is advisable for them to delegate this task to a professional with a thorough understanding of the details who can create precise financial records from the outset. Otherwise, business owners may end up investing more resources in extensive bookkeeping clean-up efforts that are not only time-consuming but also divert attention from activities that generate revenue.
So my advice in a nutshell is to hire a great bookkeeper to manage your chart of accounts and all of the other critical bookkeeping functions. You will not regret it.
