Accounting: Chart of Accounts
Posting activity and transactions can be frustrating without knowing EXACTLY where to put things. This is why bills from cpa's can be expensive. You are paying for them to clean up the sloppy transactions.
First of all, if you are not using account numbers with the account name, then you need to do so. This will highly aid you in recognizing what type of an account you are posting to. I suggest either a 3 digit or 4 digit account number. Here is the number format:
100 - 199 ASSETS
200 - 299 LIABILITIES
300 - 399 EQUITY
400 - 499 INCOME
500 - 599 COST OF GOODS SOLD (used only if you are a product based business)
600 - 999 EXPENSES
ASSETS - things you own that have value. They consist of bank accounts, furniture, fixtures, machinery, equipment, vehicles, accounts receivable, etc.
LIABILITIES - things you owe. They consist of payroll liabilities, car loans, bank loans, lines of credit, accounts payable, credit cards, etc.
EQUITY - this is the value of your business. Year after year after making a net profit or loss, the year's profit or loss is automatically posted to this account by QuickBooks. Equity can also contain company stock, and other types of equity accounts. Generally, you won't have postings to these type of accounts.
INCOME - this is what you charge your customer. It doesn't matter if it is a cash sale or an invoice. It counts as income. This doesn't mean that it necessarily goes on your tax return. That depends if you file your return on a "cash basis" method or the "accrual" method. Talk to your account to find out how you file. If you charge your customer for shipping, then that is income.
COGS - if you sell a product, then your purchases are cost of goods sold. Not to be confused with inventory. If you sell lawn sprinkling systems, you probably don't buy enough as inventory to sit around on a shelf. When you purchase it for a customer, record the purchase as COGS. If you do have inventory, then when you create purchase orders, the product is recorded in inventory, and moves to COGS at the time of sale. This is because you are pulling the product from inventory, and now it's your expense as a COGS.
EXPENSES - these are your operating expenses. They go from A to Z. The first expense is usually Advertising. The second one is usualy automobile expense. If you have an alarm system, then put this expense under security expense. Try not to just throw stuff somewhere. This is a huge problem. If you aren't sure, then make a new account. It's better if it sticks out instead of buried in office expense or something like that.
Keep in mind the following:
I am CLR on CREDITS. This means that Capital (equity), Liabilities, and Revenue (income) should be entered as a CREDIT.
I am in AWE of DEBITS. This means that Assets, Withdrawals, and Expenses should be entered as a DEBIT.
If you make a major purchase and obtained a loan, record as such: Create a liability account for the loan, and record the amount of the loan there. The purchase is an asset and this is where the offsetting entry is recorded. Loan payments should be recorded under the loan account. The asset account should be unchanged. The value is the same.
Accounting can be scary, but think of yourself as a detective. If you have a debit, where does the credit go? If you are recording a credit, where does the debit go? Every transaction must have a mirror image.
It's also a good idea to keep a daily log to record things that happen that you think you should remember. Trying to explain to your accountant 8 months later when you don't recall the details will cost you. Keep your receipts!
If you aren't using QuickBooks, you should be. If you have Quicken, Peachtree, or Microsoft Accounting, QuickBooks will convert your data.
I hope you find this article useful, and I hope it makes accounting less scary for you.