If you’ve just started running a business and keeping your company’s books, all this talk of accounts, credits, and debits might have you flummoxed. Accounting is a cross between mathematics and the mystical arts. Its goal is to record and report the financial performance of an organization. The end result of bookkeeping and accounting is a set of financial statements (The Profit & Loss Report), but the starting point is the chart of accounts.
In accounting, an account is more than an account you have at a financial institution; it’s like a bucket for holding money used for a specific purpose. When you earn money, you document those earnings in an income account, just as you might toss the change from a day’s take at the lemonade stand into the jar on your desk. When you buy supplies for your business, that expense shows up in an expense account that works a lot like the shoebox you throw the receipts into. If you buy a building, its value ends up in an asset account. And if you borrow money to buy that building, the mortgage owed shows up in a liability account.
Accounts come in a variety of types to reflect whether you’ve earned or spent money, whether you own something or owe money to someone else, as well as a few other financial situations. Your chart of accounts is a list of all the accounts you use to track money in your business.
Neophytes and experienced business folks alike will be relieved to know that you don’t have to build a chart ...