When you're running a small business, bookkeeping processes are usually not the part of the job you look forward to. Setting up accounting categories for small business probably isn't even on the list.
Still, the way you organize your books matters more than it may seem. A chart of accounts for small businessis basically the backbone of your bookkeeping system. It tells you where different transactions belong. When it's set up sensibly, your reports can give you a pretty clear picture of what's going on.
When it's thrown together, those same reports can be frustrating. You may have money coming in and going out every day, yet still struggle to answer simple questions about your business.
That's where a good chart of accounts setup makes a difference.
What Is a Chart of Accounts?
Put simply, a chart of accounts is a list of the financial accounts your business uses to organize its transactions.
Most charts are built around five main categories – Assets, liabilities, equity, revenue and expenses.
Those broad groups are then broken into more specific accounts.
For instance, instead of putting every outgoing payment into one “Expenses” account, you could have separate accounts for rent, advertising, software, insurance, etc.
You don't want five categories when one would do. But you also don't want one giant category that tells you nothing.
Why Does the Chart of Accounts Matter?
Here's the thing about accounting reports: they can look perfectly tidy while still being practically useless.
Your bookkeeping software might produce an income statement with a few clicks. But if transactions have been assigned to the wrong accounts, the report isn't going to tell you much.
Imagine trying to figure out why expenses jumped last month. If you have sensible categories, you can look at the report and quickly spot that software costs increased or that advertising spending went up.
If half your expenses are sitting in miscellaneous accounts, you'll have to dig through individual transactions to figure out what happened.
That's not what financial reports for small business are supposed to do. Your reports should make the numbers easier to understand, not turn you into a financial detective. Financial reporting services can ease this task for you.
Common Chart of Accounts Mistakes
1. Making the Chart Way Too Detailed
Less categories can feel you’re making some common bookkeeping mistakes. But that’s not necessarily true.
A small company doesn't necessarily need separate accounts for Facebook ads, Instagram ads, brochures, and every other promotional expense. Unless you genuinely need that level of information, you're creating extra work for yourself. A broader category such as “Advertising & Marketing” may give you everything you need.
Before adding a new account, think about whether you'll actually use the information later. If you're never going to compare two types of advertising spending, there may be no reason to separate them.
2. Going Too Far in the Other Direction
Some business owners go to the opposite extreme. Everything gets dumped into a handful of accounts like office supplies, bank charges, software subscriptions all in miscellaneous.
That makes bookkeeping feel quick, but it creates problems when you need to understand your spending.
You don't need a separate account for every little purchase. You do need enough accounting categories for small business to make your reports useful.
Finding that middle ground is the goal.
3. Mixing Personal and Business Spending
This is one of those bookkeeping mistakes that's easy to make and annoying to clean up. Maybe you use the business card to pay for a personal purchase or you transfer money from the business account to cover a household bill.
If those transactions are recorded as regular business expenses, your books no longer show what the business actually spent. That can affect your profit figures and make your reports misleading.
If you do make a personal transaction through the business account, make sure it's recorded correctly rather than forcing it into an expense category. Cleaning up messy books is no easy task.
4. Copying a Generic Chart Without Thinking About Your Business
A chart of accounts you found online isn't necessarily wrong. It just may not be right for you.
A restaurant, online store, plumber, and consultant don't have the same financial activity. For example, an online retailer may need accounts related to inventory and shipping. A consultant may care more about subcontractors and professional services.
Your small business chart of accounts should be built around the way your company actually earns and spends money.
5. Treating Every Expense the Same
Some costs are directly connected to producing the goods or services you sell. Others are part of keeping the business running.
That's where cost of goods sold, comes into play. For a business that sells physical products, inventory costs are a good example. If those costs are mixed into general operating expenses, it becomes harder to see your gross profit.
And gross profit is useful information. It helps you see how much is left from sales after the direct costs of producing or delivering what you sold.
6. Creating Accounts With Overlapping Names
This sounds harmless until you're the person entering transactions.
Suppose your chart contains:
- Office Supplies
- Office Expenses
- Office Costs
- Administrative Supplies
Where should a printer cartridge go? What about paper? What about a desk?
When accounts overlap, two people can record the same type of purchase differently. Clear names and simple definitions go a long way.
7. Changing Everything Every Few Months
Your business will change. Your chart of accounts may need to change with it. The problem is constantly rearranging categories because you suddenly think another setup looks better.
Too many changes make it difficult to compare reports from one period to another. Before changing an account, ask yourself whether the change solves a real problem.
What Should a Small Business Chart of Accounts Look Like?
There's no universal bookkeeping setup for Chart Of Accounts, but a simple example might include:
| Account group | Possible accounts |
| Assets | Business Checking, Savings, Accounts Receivable, Equipment |
| Liabilities | Credit Card, Accounts Payable, Business Loan |
| Equity | Owner's Equity, Owner's Drawings |
| Revenue | Product Sales, Service Revenue |
| COGS | Materials, Inventory Costs, Direct Labor |
| Expenses | Rent, Advertising, Software, Insurance, Payroll, Professional Fees |
You may need more or fewer accounts depending on your business.
Remember, your accounting software cannot solve every problem for you. Modern bookkeeping software can automate plenty of tasks.
However, automation works best when the underlying setup makes sense. If your chart of accounts is poorly organized, the software may simply help you repeat the same bookkeeping mistakes more quickly.
Take some time to establish the structure first. Then use automation to reduce repetitive work.
When Should You Get Professional Help?
You don't necessarily need an accountant or bookkeeper to set up every small business. If your finances are straightforward and you're comfortable with bookkeeping, you may be able to handle much of it yourself.
Things get more complicated when you have inventory, payroll, several revenue streams, loans, contractors, multiple locations, or a growing number of transactions. At that point, professional small business bookkeeping services can be worth considering.
The biggest benefit isn't just having someone enter transactions.
It's knowing that the books are being organized consistently and that your reports have a better chance of reflecting what's actually happening in the business.
Small Business Bookkeeping Services With AccountiPro
Bookkeeping isn’t exactly the fun part of running a business. There are always invoices to check, transactions to record, and accounts to keep up with. It can pile up pretty quickly.
AccountiPro takes that work off your hands, so you don’t have to worry about whether your books are up to date. We handle the bookkeeping while you get on with running your business.Want to take bookkeeping off your plate? Get in touch with us today and let’s get started.
