Organizing Your Chart of Accounts
When you think about it, managing your Chart of Accounts is a lot like playing Jenga. When you take out a section in your business, you have to add it back in another place in order to keep the balance between your assets and liabilities. Having full control of your Chart of Accounts allows you to monitor your equity, so you have a clear, positive line of growth in your books.
Breaking Down the Chart of Accounts
It’s easy to take control of your Chart of Accounts, but if you don’t know what it is, that could be a problem. Your Chart of Accounts is divided into 4 sections: assets, liabilities, income and expenses. The good parts are assets and income. You definitely want a high margin of assets and income compared to what you owe in liabilities and expenses. Having a higher margin equals out to a higher equity, meaning your business is heading in the right direction.
Income pretty much explains itself. It is what comes into you through assets and direct payments. However, it’s best to divide your income into two different categories: passive and active. Passive income comes in relatively easy and is cheap to generate. The other type is active income, which requires time, effort and expense on your side in order for it to sell to your customers. Having an organized tree of income makes tracking what is working easier. If you are a barbershop and are selling your services as well as commercial products like shampoo and gels, you want to put those as separate line items. Using this method allows you to see what goods make you the most profit and moving on, how you will adjust to those numbers.
Tracking your expenses is another part of making full use of your Chart of Accounts. Categorize your expenses as you would with your income, this allows you learn where your money is being divided and used for what. It’s good to minimize where your expenses fall, but individual item lists can be useful here as well. When you are buying raw goods from separate companies and want to track shipment costs for each of them, this would be the way you do so.
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