How to Set-up Your Chart of Accounts
Chart of accounts is used by Companies to organize their finances and give interested parties such as investors or shareholders a clearer view to the companies’ financial health. Chart of accounts help in separating Revenue, expenditures, assets, liabilities and ensure that financial statements are in compliance with reporting standards.
Setting up is easy, just make a list of accounts that apply to your business. You don’t need to worry if you forgot to add accounts or you don’t have yet a complete listing as you can add this anytime as you record your transactions.
These include atleast 3-4 columns:
Account Name: List of account names
Type: Type of accounts (eg: asset, liability, revenue, expense)
Description: Contains a description of the type of transaction that should be booked in the account
Account Code – If the company uses computerized accounting system, an identification code is added, this is usually a series of numbers per account type, it will tell what type of account (eg: asset, revenue) is affected by the transaction by only referring to the account codes.
The list of chart of accounts is normally shown in order the accounts appear in the company’s financial statements, balance sheet accounts, assets, liabilities, shareholders equity, followed by accounts in the income statement. You can use these financial statements as your guide in creating your Chart of Accounts
In the shown example, you’ll notice gaps on Account codes. Every account within the accounting system will be listed in numerical order and should normally given gaps between each number in order for the company to create additional codes within the same type of accounts.
For example, you want to add Notes payable, you can assign 103 as it’s account code as this is available and not been used yet in the company’s computerised accounting system.
Setting up your Chart of Accounts per Products or Services
Other small or big businesses would normally have two or more products or services offered, or both. It’s important that all sources of revenues are detailed or enumerated under your Revenue type section and their corresponding costs per revenue type. Why? So you could know your gross profit per product or revenue type. You would know which of your products or services are performing well and which of them are not. This is vital in your decision making and budgeting, and an important factor in your production and sales strategies.
If you are using XERO as your accounting software, your financial statements can be filtered per revenue type. These can be further categorized per location or per division or other groupings you wish to show in your financial statements as per your business needs.
SETTING UP YOUR CHART OF ACCOUNTS IN XERO
Setting up your in Xero is very easy. You can simply import your chart of accounts from your previous accounting system or import your custom chart or you can simply use Xero’s default Chart of Accounts. Currently, Xero has 6 Chart of Accounts template designed according to company’s business type:
- Limited Company
- Limited Company – No VAT
- Partnership – No VAT
- Sole Trader
- Sole Trader – No VAT
To view your chart of accounts in Xero, go to Accounting menu, select Advanced, then click Chart of Accounts
Click on an account to view its details. You can edit the account type, account code, Name, description, or Tax as per your business requirement
How to import your chart of accounts in Xero:
How to enter your opening balances in Xero: