As a do-bookkeeping-yourself (DBY) Small or Medium sized Enterprise – SME, do you have a chart of accounts (CoA)?
Do you record your income and expenditure based on your CoA) or only maintain a list of expenditure?
Chart of Accounts – what is this?
When thinking about our personal finances, we consider our income and expenses in different categories e.g., we consider income from salary, from side hustle, from parents and; expenditure relating to the cost for groceries, beauty products, the car, holidays, weekend outings, etc. The details may eventually be broken down when we sit down to write or type things out. Those categories in which we think about our income and expenses, are our personal chart of accounts!
When maintaining the finances of an organisation, a chart of accounts, is a table of codes that shows how the organisation’s transactions will be categorised (similar to when thinking of personal income and expenses) and recorded in the accounts.
It helps with grouping together the same type of income and expenditure e.g. one code for recording sales income and another for recording grants received and one code for recording all insurance cost and another for recording subscriptions Each grouping of income and expenditure, is allocated its own code.
The code for each category could be numeric or alpha numeric. Most software come with a generic chart of accounts, which takes away the need for setting one up. Some however give you the option of setting yours up.
If you are a small business using spreadsheets to record your income and expenditure, you should consider setting up a chart of accounts, using codes that are meaningful to you e.g. you could use PAY01 for salaries or you could use TVL01 for travel cost. Define what is included in each category and consistently allocate cost in the manner described in your definitions.
How you group your expenditure is dependent on you and what you want to monitor/measure.
Does your SME require a chart of accounts and why?
Absolutely! YES, your SME does require a chart of accounts.
Why?
- It helps summarise your expenses into categories (i.e. expense types)
- At a quick glance,
- trends in spend for each category are visible
- variances in periodic spend are visible
How does the above help? You immediately start to see patterns and interrogate the figures when they aren’t as expected. Based on the patterns emerging, you can begin to estimate future expenditure and make plans for the future. Having a chart of accounts in this manner, transforms your figures into a decision making tool,
Here is an example of some expenditure groupings for overhead/operational cost and sample of what their alpha numeric code and numeric codes could be – remember, if you are setting your chart of account up yourself, you decide what works for you, concentrating on what you want to monitor and names that are meaningful to you.
| ALPHA NUMERIC CODE | NUMERIC CODE | DESCRIPTION | NOTES |
| PAY01 | 1100 | Staff salaries | To record gross salary |
| PAY02 | 1120 | Employer’s national insurance and pension contributions | To record employers on cost |
| PRE01 | 1200 | Office rent | To record Premises rental cost |
| PRE02 | 1220 | Business rates, council tax, | To record Premises rates e.g. council tax, business rates, |
| UTI01 | 1300 | Utility | To record bills e.g. electricity, water, gas, etc. |
| UTI02 | 1320 | Insurance | Professional indemnity, fire and theft insurance, |
| UTI03 | 1340 | Communication | Telephone, internet, and email charges |
For a free review of your chart-of-accounts or for help setting one up, send an email to hello@bancservices.co.uk