Saturday, January 16, 2010

Understanding Year-End Reporting - Part 1 of 4: Your Chart of Accounts

It’s hard to imagine that it’s already 2010. The year is over and your business’ activities are history. So, what kind of financial snapshot will you be showing your accountant? Will you give her reports that accurately reflect your 2009 activity or will you give her a QuickBooks back-up and wish her luck? The more accurate your reporting, the more money you will save in accounting fees and taxes. Therefore, I want to spend the next four weeks helping you understand year-end reporting.

The biggest key to unlocking the mystery of year-end reporting is understanding your Chart of Accounts. I remember my rookie bookkeeping days when the Chart of Accounts frightened me like a monster in the closet. But, once I became familiar and comfortable with it, everything else just fell into place.

The Chart of Accounts (COA) is simply a list of all the different ways to categorize your business’ financial transactions. For each receipt you enter and each deal you close, accounts from this list are used to explain the what and why. Everything revolves around this list.

In QuickBooks, your COA can be accessed from the List drop-down menu or by hitting Ctrl-A. Once open, you will see the list of accounts, the account types and the balances. For our purposes, the list should be sorted by Type with type “Bank” at the top (click on the header labeled "Type" and it will sort by that column).

One of the first things you might notice is that only some of the accounts show balances. These are the perpetual accounts, which make up your Balance Sheet Report. The remaining accounts – Income, Costs of Goods Sold and Expenses - start at zero on Jan 1st and make up your Profit & Loss Report.

Here is a quick reference for the types of accounts you will see. BS = Balance Sheet Accounts and P&L = Profit & Loss Accounts

In the next few weeks, I will go into detail about the Profit & Loss Report and the Balance Sheet Report. I will break down each and explain how to read it, how to identify problems and what the numbers mean to you. I hope each of you has a lightbulb moment when all this information fits into place and gives you security in knowing how your financial activities affect you and your business.

Stay tuned next week for the next in this series!