For a small eCommerce business, financial accounts are vital regarding bills, a rainy day fund, and that inventory meets customers’ needs. Therefore, it is fundamental that a small business owner creates and utilizes a chart of accounts. This financial organizational tool gives businesses an insight into all company transactions. Usually, this entails liabilities, equity, revenue, and costs of goods sold. But how does it work? Here is a guide to help you understand what a chart of accounts is, how it works, and some examples to help you see how having one can benefit any business.
The chart of accounts appears as a spreadsheet containing numerous categories and subcategories displayed in the order of the financial statement. These categories include revenue, liabilities, assets, etc., broken down into other categories. For example, assets can be broken down into inventory, prepaid expenses, fixed assets, and marketable securities. From there, companies can organize their spreadsheet whichever way they prefer. Each heading has a name, description, and identification number. Depending on the category, some will be classified under a balance sheet or income statement.
An income statement account includes the company’s expenses and revenue, providing business owners with a clear overview of the financial viability. The revenue accounts keep track of the company’s sales and income. As for the expense accounts, it keeps track of all the money spent, such as wages, utilities, rent, etc. This can be beneficial not only for business owners but also to shareholders and investors. It is critical to have an income statement so that they can see where the company stands.
A balance sheet account can help any business owner see the big picture of the net worth of your business, how much money you receive, and where it is placed. Within the sheet, there are three categories that include asset, liability, and equity accounts.
We’ll start with the first category: assets. Assets record your company’s resources that provide value to your small business. They can be physical or intangible. For example, assets fall in real estate, equipment, and proprietary software. The next category is liability, your business’ debt, and unearned revenues – cash payments you’ve received before services are delivered. Finally, the last category: equity, is your assets minus your liabilities. This gives the big picture of your company’s financial situation to shareholders.
Here are some examples to give important insight to a small business owner that may be struggling to understand this concept.
For instance, the deli equipment you purchased food and supplies for your convenience store may have cost $5,000. You would then credit $5,000 to your bank account and debit $5,000 to the equipment and supplies category. You would need to do this transaction because money is leaving your company in exchange for procuring new equipment and supplies.
Consistency and consolidation are critical when you want to be efficient using this financial organization method; accuracy equals financial coherency in financial management. A business owner, for example, may want to organize by labeling and naming the eCommerce categories and sub-groups so that it is easier to find.
Otherwise, you risk perplexing when searching across different categories. Accounting software can help simplify the process. Indeed, do not attempt to manage this manually, as this opens the door to costly mistakes. Reviewing and consolidating the spreadsheet when possible makes for easier searches. The end of the year is an excellent time to search for ways to reduce all the categories listed.
This financial management tool is essential for running a successful small business. It takes time to create one. However, consider the alternative: without this concept, business operations and tracking finances become a haphazard exercise that can unintentionally and unnecessarily drain your hard-earned profits. So give this a shot and make your business organized, successful, and efficient!