Accounting, it’s all about the numbers. That’s what most think, but accounting is really a story. Your financial data (even though it is expressed in numbers rather than words) tells a story of where your business has been, where your business is currently, and where you can go in the future. Accounting is one of the functional pillars of your business; it’s important to get it right – the first time.
Understanding Your Business and Industry
It all starts with an understanding of your business and industry. Only then can you begin to ask questions about your accounting system. These questions include:
Selecting Your Basis of Accounting
The basis of accounting is the framework used to record your business transactions. There are several different frameworks however they most commonly include:
Determining What Information to Track
The key is to capture all of the transactions that occur in your business (cash and noncash) in the simplest and most efficient manner. Based on your business or industry, you may need to consider tracking your business transactions in more depth. Below are several considerations (not all inclusive but should give you an idea):
Now that you have an understanding of the information you need to track. How do you track it?
Developing Your Chart of Account
Your chart of accounts is a listing of accounts that are used to prepare financial reports. It is typically structured as follows:
5000-5999 Costs of Goods Sold
6000-6999 Operating Expenses (General and Administrative)
7000-7999 Other Income and Expense
8000-8999 Income Tax Expense
The accounts 1000-3999 are used to prepare the balance sheet and 4000-8999 are used to prepare the income statement (profit and loss). The number of individual accounts within each category will depend on the needs of your business. Rule of thumb: use the least number of accounts to achieve the financial information you need and structure it for growth. What do I mean by growth? Let’s look a little closer at a condensed assets section:
1000 Petty Cash
1100 Accounts Receivable
1300 Prepaid Expenses
1400 Fixed Assets
1450 Accumulated Depreciation
Note: the account numbers are not in sequential order. This will allow room for growth in the business.
The chart of accounts can also be used to track jobs, departments, divisions etc. Let’s say you have a location in Fargo, Bismarck and Minot and you want to be able to view the profitability for each location. You are able to track by each location by assigning a division number, 01-Fargo, 02-Bismarck, 03-Minot, and attaching it to each of the accounts as such:
5000-01 Costs of Goods Sold
5000-02 Costs of Goods Sold
5000-03 Costs of Goods Sold
Certain software will allow you to track these profit centers outside of the chart of accounts. For example in QuickBooks, you are able to have just one sales and one costs of sales account by using classes and subclasses.
Selecting an Accounting System
Tracking your information can be accomplished in two ways: manually or computerized (desktop or cloud-based). There is no right or wrong way, however computerized accounting software is more efficient which is why manual accounting is almost non-existent in today’s accounting. Cloud-based also give you the freedom to access your financial data from just about anywhere, on any device.
There are several effective accounting software solutions out there. Again, it is important to understand your needs prior to purchasing to make sure you get a solution that fits your needs.
Overwhelmed? Need more direction? Eide Bailly has the resources to help you design your accounting system or help you selected a solution that best fits your needs.
Check out our Business Outsourcing & Strategy Services to learn more.
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