Posted by Early Growth
January 31, 2013 | 5-minute read (848 words)
Regardless of what accounting system or software your startup uses, its core will be the chart of accounts (COA). A startup chart of accounts will differ from company to company, but the common thread is that it is a system of your accounting records that aligns with your financial structure and offers the level of detail required in your financial statements. More specifically, it’s an indexed list of accounts that shows classifications and sub-classifications impacted by your financial transactions. Once you’ve assigned your transactions to an account (and its corresponding number), you can then set up your general ledger and use double-entry bookkeeping to ensure that your books are balanced.
In other words, your startup chart of accounts is an accounting system,- designed specifically for your company,- that helps you track and report your income and expenses. I would, of course, recommend working with an accountant, but,- even if you outsource this task, it’s still important for you to understand how to set up a chart of accounts to best serve your business needs. Here’s how:
Set up your categories. There are five essential categories you’ll want to consider for your startup chart of accounts:
1. Assets- everything your company owns (or is owed), including current assets. Fixed assets, accounts receivable, inventory. In this category, also include an account for accumulated depreciation for each asset.
- everything your company owes (or may owe). Current liabilities include your accounts payable and taxes (both payroll and sales). Long-term liabilities might include the balance on a mortgage or credit card, loans, or some other long-term debt account.
3. Owner's equity
- your business investments. This account should include common stock and preferred stock,- in the case that you have investors at some point.
- Sales revenue is your primary source of income. You may also choose to include accounts for sales discounts or returns. It’s also a good idea to create an interest income account for any income earned on company investments. Consider, too, the cost of goods and other related sales costs under your revenue account.
- For expenses, you may want to start with the Schedule C IRS Form. While the point of your chart of accounts isn’t merely to help you to file your taxes, this tax form is still a good starting point to build on for creating your expense account. This form includes such things as advertising, contract labor, employee benefits, legal and professional services, repairs, and more.
Look to the future.
Your business will grow and change, so, when setting up your accounts, don’t just think about your current accounts. Consider you may need in the future. For example, you may not have any employees, but you likely will build out your staff at some point. Take this into account when creating your charts.
Create a numbering system.
Typically charts of accounts are established as a four-digit numbering system. Each category of accounts will share the initial digits, and then the following digits will be used for sub-categories. This gives you room to grow and add new accounts as needed. For example, your assets category could be assigned to 1000. Each asset in this account would then be assigned in sequence: 1000, 1010, 1020, etc.
Delete irrelevant accounts.
Of course, you’ll want to pick and choose the accounts that are relevant to your startup,- and leave out the rest. For example, if your startup is a service-oriented Company, then you won’t have any product inventory to account for within your chart of accounts. However, you will most likely have other resources that need to be tracked. The chart of accounts for a software company will also look radically different from that of lifestyle-oriented businesses. This is where you have to personalize your chart of accounts.
Add more granularity.
Depending on your business, it may make sense to offer a greater level of detail in some categories. For example, for companies with multiple expenses for legal or professional services, you may want to break these services out into separate accounts.
Fine-tune your chart of accounts.
As with any financial document or plan, creating a chart of accounts isn’t enough—you must update it as needed. As your startup grows, you may find that it makes sense to add or delete particular accounts. Keep working with it until it is aligned with your financial plan.
There’s no one perfect startup chart of accounts. You just want to tweak your accounting system over time until you have what you need: the necessary information to make solid financial decisions for your startup.
About Early Growth:
Early Growth is the largest national provider of outsourced CFO & accounting services in the venture capital space. For over 10 years, Early Growth has been providing finance & accounting, tax, equity management, and fund accounting services to startups at all stages. Early Growth is a strategic partner handling your finances so you can focus on your business, customers, and team.