One of the first steps of getting your accounting system set up, is getting a solid chart of accounts for your business. Depending on what sector you fall in - your chart of accounts will be different.
A business needs and should want to know where funds come and go. Your chart of accounts is a tool for gathering and organizing this type of information and directly feeds into your balance sheet and profit and loss statement.
Your accounting system should be designed and used to provide much of this detailed, summarized, and needed information.
Here are 7 tips in developing and designing an effective chart of accounts for your business.
- Accrual or Cash Basis. You’ll need to determine which accounting treatment to go under. From my experience, I’d suggest accrual basis of accounting. However, depending on your business model (if non-inventory) you might want to check out the benefits of doing a cash basis of accounting. The basis of accounting, will be the first point to dictate your COA.
- Balanced Detail. There is a trade-off between simplicity and the amount of detailed information your business needs. The devil is in the details, and you want to be able to make good use of the information in your chart of accounts. Finding a balance between a too simple basic chart of accounts and a mega detailed COA is recommended.
- Match your COA to your business. Your type of business (producer, processor, distributor, retailer, service provider, etc.) will dictate your Chart of Accounts. Even businesses that are the same type and industry might have special or unique requirements. While a service business may not have a need for an Inventory account, this is a necessity for a retailer. One company may have 8 different cash accounts, while another one has one.
- Knowing your audience. Special consideration should be given to any regulatory reporting requirement. This would be to your state, local, or federal government. Creating a chart of accounts to include key information needed to prepare tax returns or needed for any special regulatory reporting requirements is highly recommended. For example, if 280E applies to your business - I’d recommend including a 280E reserve (liability account) and 280E allocation account (expense account).
- Account Numbering. A standard chart of accounts is organized according to a numerical system. Account numbering allows for better decision making and reporting.
- Sub-Accounts. Sub accounts are a fantastic way to measure how certain components of an overall expense affect the balance. Sub accounts are optional, and allow you to track financial activity within a particular account at a finer level of detail. Sub-accounts can be used to help track expenses when several different activities may be funded by the same account.
- Key Integration. Adding a detailed list of your vendors, customers, products to integrate with your chart of accounts is fundamental. Not only can you analyze the detail on your customers and suppliers, but you can also match up certain products or services to your specific chart of accounts. Automation is key!
Here is a quick overview of what a portion of the Chart of Accounts could look like.
1010 CASH Checkings
1020 CASH Savings
1030 CASH Vault 1
1035 CASH Vault 2
1110 A/R Trade
1190 A/REC Allowance for Uncollectible Accounts
1210 INV – Clones
1220 INV – Flower
1230 INV – Edibles
1290 INV – Reserve for Obsolescence
1300 OTHER CURRENT ASSETS
1310 PREPAID – Rent
1320 PREPAID – Taxes
1330 PREPAID – Deposits
1400 PROPERTY PLANT & EQUIPMENT
1410 PPE – Buildings
1420 PPE – Machinery & Equipment
1430 PPE – Computer Equipment
1440 PPE – Furniture & Fixtures
1450 PPE – Leasehold Improvements
1500 ACCUMULATED DEPRECIATION & AMORTIZATION
1510 ACCUM DEPR Buildings
1520 ACCUM DEPR Machinery & Equipment
1530 ACCUM DEPR Computer Equipment
1550 ACCUM DEPR Furniture & Fixtures
1560 ACCUM DEPR Leasehold Improvements
1600 NON – CURRENT RECEIVABLES
1610 NCA – Notes Receivable
1620 NCA – Retainage Withheld
1630 Organization Costs
1640 Patents & Licenses
1650 Intangible Assets – Capitalized Software Costs
You'll notice that this sample chart of accounts includes numbering, sub-accounts, and has enough detail for the business owner to run reports and enough detail for the accountant to be happy. You can learn more about accounting systems in the Cannabis Finance Bootcamp training.