Do you get the right reports for your business? Do you know what income is coming in on each product/service you are selling? What about expenses? Do you know how much you are spending on each thing in your business? The only way that you are going to know all this is if you have your Chart of Accounts set up correctly.
Last week we looked at setting up your Assets, Liabilities and Owner’s equity so that your Balance Sheet and other reports give you the information you need. This week we are looking at your Income and Expenses in your Chart of Accounts and making sure it is set up correctly so that you can get better reports…
But firstly a reminder on what is a Chart of Accounts. A Chart of Accounts is a listing of all the accounts used in the General Ledger. The accounts are what the business uses for recording transactions when doing their bookkeeping. Businesses have the flexibility to tailor their Chart of Accounts to what best suits their needs. The better you set up your Chart of Accounts the better reports you will get from your accounting program.
Revenue (Income) is the amount of money that the company actually earns during a specific period. This includes discounts and deductions for returned merchandise. You can have Operating Revenue (income) and Non-Operating Revenue (Income).
Operating Revenue is typically earnings before interest and taxes. It is earned from the sale of goods and services specifically related to the business.
Your Chart of Accounts can look like pretty much whatever you want it to, the more detailed it is the better reports you get from your accounting program. Following is an example of what it could look like.
42000 Miscellaneous Income
For you to get a better idea of what I mean by the more detailed it is the better, lets look at my Bookkeeping Business, this is my Revenue (Income)…
- Bookkeeping Services
- Payroll Services
- Training Services
- Software Sales
For a Hospitality Business you may have the following in your Chart of Accounts:
- Bar Sales
- Bar Food Sales
- Bar Alcohol Sales
- Bar Non-Alcohol Sales
- Bistro Sales
- Bistro Food Sales
- Bistro Alcohol Sales
- Bistro Non-Alcohol Sales
- Function Sales
- Function Food Sales
- Function Alcohol Sales
- Function Non-Alcohol Sales
- Function Room Hire
- Function Sundries
- Conference Sales
- Conference Food Sales
- Conference Alcohol Sales
- Conference Non-Alcohol Sales
- Conference Room Hire
- Conference Sundries
- Bottle Shop Sales
- Bottle Shop Alcohol Sales
- Bottle Shop Non-Alcohol Sales
- Bottle Shop Snack Sales
- Bottle Shop Ice Sales
And it can go on and on. Remember, the more detailed your Chart of Accounts is the better reports you are going to get.
Non-Operating Revenue is gains from sources not related to the typical activities of the company. It can include gains from investments, sales of property or assets.
Your Non-Operating Income in your Chart of Accounts will look something like this:
81000 Other Income
81100 Interest Income
81200 Trade in on Motor Vehicle
81300 Rent Received from Investment Property
Expenses are the amounts paid or incurred for the purpose of earning revenue, such as paying wages or repairs to a vehicle, which may be used in the business.
Expenses can be broken down into Cost of Goods Sold, Operating Expenses and Non Operating Expenses.
Cost of Goods Sold are the direct costs incurred in the production of the Goods Sold by the business. This includes the cost of the materials used in creating goods along with the direct labour costs used to produce the goods.
As with the income, the more detailed your Cost of Goods Sold is the better reports you will get. Your Chart of Accounts could look like this:
Cost of Goods Sold
51000 Purchases for Resale
If you were running a hospitality business your Cost of Goods Sold could look like this:
- Bottle Shop/Bar Purchases
- Alcoholic Beverages – Beer
- Alcoholic Beverages – Wine
- Alcoholic Beverages – Spirits
- Alcoholic Beverages – Stubbies & Cans
- Non Alcoholic Beverages – Dairy
- Non Alcoholic Beverages – Coffee
- Non Alcoholic Beverages – Cordials
- Non Alcoholic Beverages – Juices
- Bistro Expenses
- Food Purchases
- Coffee Purchases
- Dairy Purchases
- Bistro Supplies
- Kitchen Supplies
- Bar Supplies
Operating Expenses are expenses incurred in the carrying out of the businesses day-to-day activities; they are not directly associated with the production of goods or services.
Once again, the more detailed your expenses are in your Chart of Accounts the better reports you will get. Your Chart of Accounts can look like this:
61000 General and Administrative
61110 Accounting Fees
61130 Bank Charges
61140 Bookkeeping Fees
61145 Client Gifts
61150 Computer Repairs/Supplies
61160 Depreciation Expenses
61170 Expensed Equipment
61190 Legal Fees
61200 Meeting Expenses
61210 Office Supplies
62000 Communication Expense
62130 Mobile telephone
63000 Motor Vehicle Expenses
63100 MV – Expense – Vehicle 1 (AAA-111)
63110 MV 1 (AAA-111) – Depreciation
63120 MV 1 (AAA-111) – Fuel
63130 MV 1 (AAA-111) – Parking & Tolls
63140 MV 1 (AAA-111) – Registration & Insurance
63150 MV 1 (AAA-111) – Service & Repairs
63200 MV – Expense – Vehicle 2 (ZZZ-222)
63210 MV 2 (ZZZ-222) – Depreciation
63220 MV 2 (ZZZ-222) – Fuel
63230 MV 2 (ZZZ-222) – Parking & Tolls
63240 MV 2 (ZZZ-222) – Registration & Insurance
63240 MV 2 (ZZZ-222) – Service & Repairs
64000 Occupancy Expenses
64130 Property Insurance
64140 Property Taxes
64170 Water Rates
66000 Payroll Expenses
66110 Fringe Benefits Tax
66120 Staff Amenities
66130 Staff Recruitment
66140 Staff Training
66150 Superannuation Expense
66160 Wages & Salaries
66170 Workers’ Compensation
66180 Other Employer Expenses
Non Operating Expenses are expenses incurred by activities not relating to the core operations of the business. They can include interest charges or borrowing costs.
Your Chart of Accounts may look like the following:
91000 Interest Expense
92000 Loss on Sale of Motor Vehicle
93000 Investment Property Expenses
99999 Client to Advise
We use Client to Advise for items we are unsure of. We then take the list to the owner of the business and ask them where to allocate these expenses.
So now you have a better understanding of the Chart of Accounts, take a look at yours, what improvements can you make? What accounts do you better understand now? If you would like to download a copy of the Chart of Accounts that is listed throughout this post and last weeks post, just click HERE.
If you would like to download an Excel version so you can import it into your accounting program please click on the button below.
An let me know what you like and dislike about your Chart of Accounts and what you have changed since reading this blog 🙂