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Chapter 4: Setting Up a Basic Ledger

04
Bookkeeping
  1. Chart of Accounts

What Is a Chart of Accounts?
A Chart of Accounts (COA) is a structured list that categorizes all of a business’s financial accounts. It acts as the backbone of your bookkeeping system, ensuring that every transaction can be classified appropriately.

Typical Categories

  1. Assets (e.g., Cash, Accounts Receivable, Equipment)
  2. Liabilities (e.g., Accounts Payable, Loans Payable)
  3. Equity (e.g., Owner’s Capital, Retained Earnings)
  4. Revenue (Income) (e.g., Sales, Service Income)
  5. Expenses (e.g., Rent, Utilities, Office Supplies)

How to Create One

  1. Brainstorm Account Types: Consider all financial activities (cash, bills, sales, etc.) that occur in your business.
  2. Organize into Main Categories: Group similar transactions under major headings (like “Operating Expenses” vs. “Non-Operating Expenses”).
  3. Assign Account Numbers (Optional but Helpful): For example, Assets might start at 1000, Liabilities at 2000, Equity at 3000, etc.

Why It Matters

  • A well-structured chart of accounts helps you stay organized and consistent with your postings.
  • It simplifies reporting, making it easier to generate financial statements (like the balance sheet or income statement).
  1. Tracking Income & Expenses

Recording Income

  • When: Record income when you make a sale, earn revenue, or receive a payment.
  • Where: Debit the Cash (or Bank) account if you’re receiving money, and credit the appropriate Income or Revenue account.
  • Example: You earn $1,000 from a consulting service.
    • Debit Cash $1,000 (increases asset)
    • Credit Consulting Income $1,000 (increases revenue)

Recording Expenses

  • When: Record expenses when you pay bills, purchase goods or services, or incur costs.
  • Where: Credit the Cash (or Bank) account if you’re paying out money, and debit the Expense account.
  • Example: You pay $200 for office supplies.
    • Debit Office Supplies $200 (increases expense)
    • Credit Cash $200 (decreases asset)

Tips for Accuracy

  1. Use Clear Descriptions: Note the purpose of each transaction (e.g., “Client Payment – Project XYZ”).
  2. Categorize Expenses Properly: Keep consistent naming (e.g., “Office Supplies” vs. “Office Stationery”) to avoid confusion.
  3. Regular Updates: Post entries daily or weekly to avoid a backlog and potential errors.

Why It Matters

  • Properly tracking income & expenses provides an accurate view of profitability and helps you identify where you can cut costs or invest more.
  • Updated records simplify tax preparation and ensure you don’t overlook important deductions or miss any revenue streams.

Key Takeaway

  • A Chart of Accounts gives you a clear, consistent framework to categorize transactions.
  • By tracking income & expenses methodically, you can maintain a basic ledger that reflects the true financial health of your business.

Setting up a logical ledger and regularly reviewing it is a crucial habit for any efficient bookkeeping system.