Making a List, Checking It Twice: Your Chart of Accounts Is Indispensable to the Budget!

              The chart of accounts lists all of the necessary budgetary accounts that you use in your business; they are included in the general ledger of an organization.  Detailing your chart of accounts is one budget exercise that will take some time. By devoting enough time, you’ll clearly identify where your money comes from and how it is accounted for in your accounting system.   You’ll use the chart to aggregate information for financial statements.

            Let us give a simple example. There are many others, but this example shows you the relevance of the approach.

            Assume that you have identified accounting classes for the following four categories:

1.    Assets:

§  Cash

§  Marketable Securities

§  Accounts Receivable

§  Prepaid Expenses

§  Inventory

§  Fixed Assets

§  Accumulated Depreciation

§  Other Assets 

2.    Liabilities:

§  Accounts Payable

§  Accrued Liabilities

§  Taxes Payable

§  Wages Payable

§  Notes Payable 

3.  Stockholders' Equity:

§  Common Stock

§  Retained Earnings 

4.       Revenue:

§  Revenue

§  Sales returns and allowances (contra account) 

5.       Expenses:

§  Cost of Goods Sold

§  Advertising Expense

§  Bank Fees

§  Depreciation Expense

§  Payroll Tax Expense

§  Rent Expense

§  Supplies Expense

§  Utilities Expense

§  Wages Expense

§  Other Expenses

With this simple list, you now have budgetary categories where you can document each expense in a clear and defined manner and track them over time.

You can also get very specific. Some charts of accounts go into explicit detail to document expenses.  Consider the advertising expense line item.  The hierarchy may expand like this:

            5.0 Expenses

                        5.2 Advertising Expense

                                    5.2.1 Advertising - Newspaper

                                    5.2.2 Advertising - Social Media

                                                5.2.2.1 Facebook

                                                5.2.2.2 Instagram

                                                5.2.2.3 Twitter

                                    5.2.3 Advertising - Promotional Products

            The chart then becomes a tracking system. If, for example, you are seeing that a large number of returns are occurring, your proper accounting of these returns helps you explore why are you receiving so many returned products and issuing credits for each product return.  Is the product defective? Was the wrong product sent? Was there an ordering error by the customer?  Did your firm send a substitute that the customer was unhappy with?  Not only does this ensure that your bookkeeping is accurate and correct, but now you can make inventory adjustments or resource changes to reverse a negative course and positively influence the bottom line.  

            Remember, we at Solomon Bruce Consulting LLC are NOT accountants or lawyers.  However, our work identifies issues that could benefit from the expertise of an accounting or legal professional.

So, make your list, check it twice, and keep us in mind for a third party review if needed.