A chart of accounts can help ensure that everything is being inputted correctly and balanced out. However, it can help your small business in many ways.
The different categories comprising the chart of accounts can be a significant insight into how well your business is doing over time and which investments paid off. Here’s a brief guide on how you can utilize a chart of accounts to help your small business.
What Is a Chart of Accounts?
A chart of accounts is used in accounting to help analyze your financial activities over time. They compile your accounts together in one place so you can understand how your business is doing.
It comprises five categories: your assets, liabilities, equity, revenue, and expenses. Depending on your business type, you may have a Cost of Goods Sold. These five factors can help you understand how well your business is performing and where you can improve.
How Does the Chart of Accounts Help a Business?
Analyzing the chart of accounts can help you see which areas need improvement. Although these categories can fluctuate throughout the year depending on your business type, you can see which factors need more focus.
But how can you use the chart of account categories to better understand your small business? The following are some examples of how to utilize the data to your advantage:
- Assets: Analyzing your assets lets you see the value of your business and can help you make investment decisions in the future.
- Liabilities: Looking at your debts will help you decide how to pay for them and if you can invest your money in other ventures.
- Shareholder’s Equity: Managing this area can help you and your stockholders look at your quarterly and annual finances to see if you’re still worth the investment.
- Revenue: Considering the state of your revenue is essential for making business decisions that can affect your profitability.
- Expenses: Tracking your expenses can help you realize which investments are worth it and what may need to be reevaluated.