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Finance Learning Lab – Micro Course on Small Business Bookkeeping and Finance (Part 9 of 10)

Let’s talk chart of accounts. So you remember I keep talking about all your transactions going on over here. Well your chart of accounts is whenever you decide to create sub-buckets or sub-categories. So let’s say that you created a subcategory called, “Advertising”. You may have spent money this month on MailChimp as your email provider. Maybe you had a web hosting cost. Maybe you had purchased a domain for your website and you’re using that for promotional materials. Maybe you went to Staples and you bought some business cards. And you said, “You know what when I’m looking at my income statement and I have all these expenses listed, I really don’t want a laundry list of 400 expenses. I want to group them, but I want to group them into these categories”. So I’m gonna create this bucket that I’m going to call “Advertising” and I’m going to group all of those expenses, your MailChimp, your website, all of these different things into a bucket called “Advertising”. So that is all that it’s doing. Whenever you ever hear anything referred to as the coding or the chart of accounts, all it is is taking the population of transactions and you create your own cheat sheet to say, “If this category of expense, then put it into this bucket”. And so what that means, if you think about the purpose of your accounting system again, is so that you can get two pieces of paper; you can get your income statement and your balance sheet at the end of the year. Ultimately you want to make sure that if you want an income statement that is going to let you see the details of all of your salary, your payroll and contractor cost then that’s going to be a bucket you might want.

Here’s where people run into a little bit of a trap. So they either complicate their life to no end by creating this very complicated chart of account and then they can’t remember what expenses they put into what different buckets. So they’ll try to summarize things in these 20 different buckets but forgetting that the bucket is a tool there to help you. You actually don’t need to use sub-buckets if you wanted to. There is no reason from an accounting perspective that you could not have a chart of account for every single vendor. That’s right, it’s not common practice, it’s not typically what’s recommended but if you wanted to you actually could have Advertising: Mailchimp, Advertising: Web-hosting, Advertising: domain name. So remember, your chart of accounts ,you are in control of. You are in the driver’s seat. It’s your bucket so that you know and you understand and you can dissect your own numbers. The other thing to be really careful about with the chart of accounts is making it flexible. So it’s something that whenever you’re first starting up your business, you might either go with a quote on quote “System Defaults”. Be very careful of that because there’s such a variety of different types of businesses so what’s relevant for you to analyze on a regular basis every month might be very different than any kind of defaults that someone else is recommending for you. So make sure that your chart of accounts is working for you and you’re not working for it.

The other thing is to keep it incredibly flexible because when you’re starting a business, you’re at that startup phase, there is a lot of unknowns. You might think that what you’re gonna spend over the next 3 months will be on these different types of purchases and 6 months later your business might have pivoted and gone in a totally different direction. The amount of changes that happen in a business in the first 5 years is dramatic. So having a really really fixed, static chart of accounts based on something that worked for you or for what you thought was going to work for you three months and holding yourself hostage to that 3 years later when your business has evolved, don’t do that. Your chart of accounts exists for you and only for you, not for your bookkeeper. There are certain mandatory categories that you’re going to want to have in your chart of account in order to make sure that your tax accountant can pull out the information they need for those particular fields. But 99% of those fields are highly aggregated. So you are in most cases going to be perfectly fine. If you want to make sure that your chart of accounts will still meet those areas, all you’re going to do is just a quick Google search for the CRA tax form and you can just go and look through what those categories are. It’s accessible to anyone with an internet connection. Let’s say I really want to group all of my professional development and all of my training into 2 different categories, you can do that. Or if you want to amalgamate all of that with your office supplies and treat that as your general overhead, you can do that. So don’t feel hostage to your chart of accounts.

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