Legacy Field Notes: Chart of Accounts Is Where Meaning Lives

After company settings and bank behavior, the next place files begin to fracture is the Chart of Accounts.

This is where transactions stop being activity and start becoming meaning.

In 2018, I was seeing files where transactions existed and reports ran, but the story the numbers told no longer matched the business.

This post came out of noticing that disconnect.

It reflects how I was thinking about structure, allocation, and reporting behavior at the time, before those ideas were formalized into a named diagnostic framework.

Original Context

Originally written: December 2018
Platform: Facebook

The original blog site was lost during a hosting migration.
The Facebook post below remains the contemporaneous public record.

Cleaning the Bookkeeping Mess: Chart of Accounts

In this review, I am going to discuss the Chart of Accounts (AKA the General Ledger Accounts) which will be your starting point of where all your transactions will be allocated and show in your financials.

The WHAT:

Chart of Accounts: The chart of accounts (COA) lists all your accounts that are available for recording all your transactions. Most, if not all accounting software use the double-entry system of accounting, which is a minimum of two accounts that is needed for every transaction (at least one account is debited and at least one account is credited).

When first setting up your QuickBooks Online account, you will be asked what your industry is, which QBO will provide a sample of that industries chart of accounts. QBO is very flexible and will allow you to tailor your CHOA to best suit your needs, including adding accounts as needed, editing them and merging them.

The WHY:

Understanding your Chart of Accounts is important even if you are just starting out or your business is not very complex. There are four main sections: Assets, Liabilities, Income, and Expenses. Equity too, but you will hardly manage this account.

You just need to remember that the transactions that are entered into your Chart of Accounts is what your CPA, EA, or Tax accountant is going to use in order to file your taxes. Depending on what is where will determine on your deductions you can take or not take.

The HOW:

Login to QBO and go to reports > profit & loss

• Are you using account numbers? If so, are they numbered correctly?
• Are all accounts setup as the correct type? (I.e. Assets, Liabilities, Income, Etc)
• Look for negative amounts on your Profit & Loss statements which is telling you something was not entered correctly. Either an income came in as an expense or vice versa
• Are there expenses that should be COGS? If you a purchasing product to be sold back to your customer, these should be allocated in a COGS account
• When drilling into each category, do the vendor names or memo make sense to the account? For instance, if you have job materials and there is a transaction for meals maybe this shouldn’t be here?
• Do you have a loan for a vehicle? Is the purchase in a fixed asset account? Do you have a loans payable account? Are you allocating applicable interest payments to an interest expense account?

Below is a great list to use if you are unsure where to put your transactions:

Cost of Goods Sold Accounts:

• Blueprints and Reproduction: Blueprints, photostats, and other printing expenses
• Bond Expense: Construction bonds expenses directly related to jobs
• Construction Materials Costs: Construction materials costs
• Contracted Services: Direct labor costs for contract (non-employees) performing services for clients
• Equipment Rental for Jobs: Rent paid for rented equipment used on jobs
• Freight and Shipping Costs: Freight-in and shipping costs for delivery to customers
• Freight Costs: Costs of freight and delivery for merchandise purchased
• Job Materials Purchased: Construction materials used on jobs
• Linens and Lodging Supplies: Costs of linens and other supplies for guest rooms
• Materials Costs: Cost of materials used on jobs
• Media Purchased for Clients: Print, TV, radio, and other media purchased for clients
• Merchant Account Fees: Credit card merchant account discount fees, transaction fees, and related costs
• Other Construction Costs: Other costs directly related to jobs such as waste disposal, onsite storage rental, etc.
• Other Job Related Costs: Other costs directly related to jobs such as waste disposal, onsite storage rental, etc.
• Parts Purchases: Purchases of parts for use on customer repairs or resale
• Purchases – Hardware for Resale: Purchases of hardware items for resale that are not tracked or counted in inventory
• Purchases – Resale Items: Purchases of items for resale that are not tracked or counted in inventory
• Purchases – Software for Resale: Purchases of software items for resale that are not tracked or counted in inventory
• Subcontracted Services: Subcontracted services for customer service orders
• Subcontractors Expense: Subcontracted services performed by other contractors
• Tools and Small Equipment: Purchases of tools or small equipment used on jobs
• Worker’s Compensation Insurance: Worker’s compensation insurance premiums

Expense Accounts:

• Advertising and Promotion: Advertising, marketing, graphic design, and other promotional expenses
• Auto and Truck Expenses: Fuel, oil, repairs, and other maintenance for business autos and trucks
• Automobile Expense: Fuel, oil, repairs, and other automobile maintenance for business autos
• Bank Service Charges: Bank account service fees, bad check charges and other bank fees
• Business Licenses and Permits: Business licenses, permits, and other business-related fees
• Car and Truck Expenses: Fuel, oil, repairs, and other car and truck maintenance
• Chemicals Purchased: Costs of chemicals used in farming operations
• Computer and Internet Expenses: Computer supplies, off-the-shelf software, online fees, and other computer or internet related expenses
• Continuing Education: Seminars, educational expenses and employee development, not including travel
• Depreciation Expense: Depreciation on equipment, buildings and improvements
• Dues and Subscriptions: Subscriptions and membership dues for civic, service, professional, trade organizations
• Equipment Rental: Rent paid for rented equipment used for business
• Fertilizers and Lime: Fertilizers and lime purchased for farm operations
• Freight and Trucking: Amounts paid for freight or trucking of farm products
• Gasoline, Fuel and Oil: Gasoline, fuel or oil used for farm machinery
• Insurance Expense: Insurance expenses
• Insurance Expense: General Liability Insurance
• Insurance Expense: Life and Disability Insurance
• Insurance Expense: Professional Liability
• Insurance Expense: Workers Compensation
• Interest Expense: Interest payments on business loans, credit card balances, or other business debt
• Janitorial Expense: Janitorial expenses and cleaning supplies
• Landscaping and Groundskeeping: Landscape maintenance, gardening, and pool maintenance costs
• Marketing Expense: Advertising, marketing, graphic design, and other promotional expenses for our company
• Meals and Entertainment: Business meals and entertainment expenses
• Office Supplies: Office supplies expense
• Payroll Expenses: Payroll expenses
• Postage and Delivery: Postage, courier, and pickup and delivery services
• Printing and Reproduction: Printing, copies, and other reproduction expenses
• Professional Fees: Payments to attorneys and other professionals for services rendered
• Rent Expense: Rent paid for company offices or other structures used in the business
• Repairs and Maintenance: Incidental repairs and maintenance of business assets
• Research Services: Research costs including legal library and subscriptions
• Salon Supplies, Linens, Laundry
• Seeds and Plants Purchased
• Shop Expense
• Small Tools and Equipment
• Storage and Warehousing
• Taxes – Property
• Telephone Expense
• Travel Expense
• Uniforms
• Utilities

This is just a short list of questions I ask myself when I am doing the cleanup for a new client. Always consult with a professional who knows what they are doing and really knows the questions to ask to get your chart of accounts setup correctly the first time.

I pride myself in being that person who helps struggling business owners construct a better business, form a better team, and create a better process.

Until next time,

Candice Thompson
For The Love of Bookkeepers