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The chart of accounts or COA is a list of accounts that are present in your business’ general ledger. It makes locating accounts much easier when all of them are listed in a specific manner in one place. Every chart of accounts contains a name, description, and code. The complexity of the chart of accounts increases as the size of the business expands. A small business can have a hundred accounts while a larger corporation can have thousands of accounts in its chart of accounts. In COA, the accounts can be listed with the balance sheet accounts followed by income statement accounts.
One company’s chart of accounts can differ from another company’s COA because of the differences in how they operate. For easier comparison purposes, COAs are kept the same every year. A business can make use of its organization chart when developing its chart of accounts. For instance, let us say that company A has five 5 departments and each department has its separate set of expenses. In the chart of accounts, the categorization is likely to occur in terms of different departments because that is how the business operates. Hence, there is no hard and fast rule about the number of accounts and their categorization when creating a COA.
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There is a method to create a chart of accounts. Here is a simple outline of how you can get started with COA for a small business.
Step 1: Parent accounts
The chart of accounts is supposed to be organized and make financial information retrieval easy for you and outsiders whenever it is required. To make it simple for you and others, the preparation of a chart of accounts starts with determining the parent accounts which are the major categories that your accounts fall under. These accounts will contain sub-accounts and so these are broad categories. Examples of parent accounts are asset accounts, liability accounts, stockholder’s equity, revenue, and expenses.
Step 2: Business accounts
Next in the preparation of COA, it is time to create your business accounts. Before you do that you should take a moment to think about the nature of your business and its operations. Think about the type of transactions that take place in your business so that you can focus on particular business accounts. The business accounts are essentially your sub-accounts. They may include income tax payable, accounts receivable, accounts payable, cash, and so on. Each of these sub-accounts needs to be then connected to the parent account. That is, determine which parent account they come under.
Step 3: Assignment Of account numbers Or names
The next step in COA creation is the assignment of account numbers or names. For small businesses, you can start with four-digit or five-digit numbers to keep things tidy. This numbering system is generally organized in the following way. Accounts numbered from 10000 to 19000 are for assets, the numbers 20000 to 29000 are for liabilities, the numbers 30000 to 39000 are for owner’s equity, the numbers 40000 to 49000 are for revenue, and the numbers 50000 to 59000 are for expenses. Depending on the type of business that you are operating, you might not need a certain parent account in which case you can skip that.
Every business does not choose to manage COA with the number system mentioned previously. Businesses can assign names instead of numbers. For example, if a business is dealing with a particular firm, then they can use and assign the name of the firm instead in their chart of accounts. The nature of the account can also be used to assign an appropriate name such as salary, fees, and so on. Software solutions designed for small businesses are increasingly making it easier for businesses to manage COA by allowing them to assign names rather than use the number system.
Here are some tips to organize your chart of accounts.
Opt for simplicity
It is easy to get into the nitty-gritty and to make the process more complicated than it should be. For example, when assigning titles, keep it concise and straightforward. This is especially true when assigning titles. It is easy to be too specific about the transaction but then it might not make sense to the rest of your team. Instead, opt for general titles that are easily understandable and are of the standard type. For instead, ‘repair’ is sufficient when you have spent money on repairing equipment.
Stay away from being over-specific
This ties in with the first point but is important to consider nonetheless. When you are setting up different accounts, don’t be tempted to set up for a particular seller. You can have various accounts for sellers but don’t specify according to the seller’s name. This might sound like a good idea but for COA, it isn’t. You can just have an account called sellers where you have account details of different sellers you do business with. This will keep it more organized and crisp making COA serve the purpose it was intended to in the first place.
Don’t make the mistake of doing something and then never reviewing it ever again. You can go with the flow and end up creating way too many accounts which eventually turn out to be unmanageable for your small business. If you review and find that some accounts’ information can be clubbed together to a larger account, then do so. This can save you considerable time in the future and it will make it much simpler when it comes to management. However, do this only if the account information isn’t needed for the creation of specific reports later on.
Consistency is key for all aspects of your business but more so for the chart of accounts. You must be clear from the get-go to ensure you can use the COA for years to come. It is much easier to compare the financial situation when you have the same number of accounts over the years rather than manage a few hundred accounts this year, a few thousand accounts the next year, and so on. This is why thinking of and determining the right accounts is of such high importance from the beginning when it comes to the COA.
TallyPrime is one of the simplest ERP accounting software solutions you will ever use for your business. It scales with you and makes the creation and maintenance of COA a breeze. It comes with a pre-defined chart of accounts, meaning you just need to plug in your general ledgers and start working.
The business management software comes with capabilities and flexibility that extend way beyond a simple accounting solution that has limited functionality. TallyPrime enables you to manage your business with more ease, makes removal of accounts effortless, and automates many tasks thereby making COA simpler than ever. It enables you to manage cash flow in your business better than ever before.
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