The first step to setting up a good accounting structure is to determine the different departments, divisions, or locations you may want to track. For example, you may determine you want to track residential work separately from commercial work. You also may want to track your administrative expenses or sales and marketing costs as separate departments so that you can easily see how much you’re spending in each area. If you have multiple business units or locations–for example an office in Chicago, Illinois and Madison, Wisconsin, you’ll likely want to separate those out into different divisions so that you can ensure each location is performing to the level you want.
Assuming you have one geographic location, but you do different types of work, your divisions might look like this:
- Commercial
- Residential
- Admin/Overhead
If you do have multiple locations, you may end up with divisions that look like this:
- Chicago
- Commercial
- Residential
- Madison
- Commercial
- Residential
- Administrative/Overhead
Once you have determined your different divisions, then you need to decide what types of activity you want to track. Do you have different services that you provide? You’ll want to set up a revenue account for each service. In addition to each revenue account, you’ll want to create corresponding Cost of Goods Sold (COGS) accounts. For example, you may have revenue accounts for Asphalt, Concrete, Patching, and Other. If these are the categories you want to track, you may want to then split out your materials costs by the same categories. There is no one way to set up your chart of accounts, but it’s important to set up accounts and break things out in a way that you want to be able to review the activity.
After your Revenue and Cost of Goods Sold accounts are set up, you’ll want to create accounts for each of your operating expenses. This is for expenses that are not directly related to revenue production, such as administrative labor costs, rent, utilities, accounting, marketing, and other overhead costs. You should set these up in the same manner as you did for the Revenue and COGS accounts. Set up an account for each category you want to track. Other than a few expense items that need to be tracked for tax reporting purposes, there is no right or wrong answer when it comes to choosing the expenses that you want to track. Set up accounts that allow you to track the spending that you want to see.
One thing to consider as you set up your chart of accounts is that less is more. Do not set up an account for every single vendor or every time you come across a new type of expense. Think about the key areas that you need to review to understand your business, trends, and performance. Those are the accounts you’ll want to set up so that you can review results each month. You don’t want to look through five different pages of a Profit and Loss statement to try and figure out if there is an area you need to be concerned about. As a general rule, if you don’t have at least five to 10 transactions hit a specific account within a year, you may not need to have that account separated from the others. Try to group vendors and expenses into categories that will help you to understand areas where you can make changes to your activity to impact your results.
Your accounting structure is a key factor in setting up a financially successful business. Simplify. Start with the high-level categories you want to track. You can always add additional divisions and categories as you scale.
