Essential Accounts Every Small Business Owner Should Know
Whether you're doing the bookkeeping yourself or using bookkeeping services for small businesses, understanding the essential accounts within your COA is critical. Here are the key accounts every small business owner should be familiar with:
Cash Account
The cash account is the most critical account in your COA. It records all transactions involving cash, including payments received and payments made. This account is essential for tracking your cash flow, ensuring that your business has enough liquidity to meet its short-term obligations.
Accounts Receivable
Accounts receivable track money owed to your business by customers for goods or services provided on credit. This account is crucial for managing your cash flow and ensuring timely payments from customers.
Inventory Account
If your business deals with physical products, the inventory account will track the value of goods available for sale. Proper inventory management is essential for understanding your cost of goods sold (COGS) and maintaining healthy profit margins.
Accounts Payable
Accounts payable are the opposite of accounts receivable. It tracks money your business owes to suppliers or vendors for goods or services received. Keeping a close eye on accounts payable helps manage cash flow and avoid late payment penalties.
Loans Payable
If your business has any outstanding loans, the loans payable account will track the amount owed, including interest. This account is vital for managing debt and ensuring timely payments to creditors.
Owner’s Equity
Owner’s equity represents the owner’s stake in the business after all liabilities have been subtracted from assets. This account is crucial for understanding the true value of your business.
Revenue Accounts
Revenue accounts track income earned from your business operations. This includes sales, service fees, interest income, and any other sources of revenue. These accounts are essential for understanding your business’s income streams and overall profitability.
Expense Accounts
Expense accounts record all the costs associated with running your business. These can include rent, utilities, payroll, marketing, and office supplies. Properly categorizing expenses helps in identifying areas where you can cut costs and improve profitability.
Cost of Goods Sold (COGS)
COGS accounts track the direct costs associated with producing goods or services sold by your business. This is a critical account for determining your gross profit margin and setting appropriate pricing for your products or services.
Depreciation Accounts
If your business owns any fixed assets like buildings, machinery, or vehicles, depreciation accounts track the reduction in value of these assets over time. Depreciation is essential for accurately reflecting the value of your assets on your balance sheet and for tax purposes.
Taxes Payable
Taxes payable account records the amount of taxes your business owes to the government, including income tax, sales tax, and payroll taxes. This account ensures that your business remains compliant with tax obligations.
Dividends Account
If your business distributes profits to shareholders, the dividends account will track these payments. This account is essential for businesses with multiple owners or shareholders.
Customizing Your Chart of Accounts
While there are standard accounts that most businesses will need, your Chart of Accounts should be customized to fit your specific business needs. For example, a retail business might have accounted for inventory and COGS, while a service-based business might have accounts for labour costs and service fees.
