Setting up a Chart of Accounts
Thoughts on how much detail to capture in your record-keeping about job costs and business expenses. November 23, 2012
Question
I've been asked by my bookkeeper to narrow down our "chart of accounts" (what I called overhead expenses before Quickbooks came around). There are too many of them. The multitude of options makes entering and reading the reports confusing. I had intended to study reports of the accounts in order to make better business decisions, but it never amounted to anything. Do you have any recommendations on what a four person shop should be listing? If so, what insight do these labels give you?
Forum Responses
(Business and Management Forum)
From contributor S:
Well with Quickbooks you might as well have an account for every type of expense. I tried keeping books by hand and well that turned out to be a bad idea. It proved to be a challenge just keeping three-four accounts in order.
From contributor L:
I would suggest three expense categories: Direct Materials, Indirect Materials, and Shop Supplies. Items that go directly to a specific job get put into Direct Materials. Items like glue, screws, poplar, and etc. that make their way into all jobs go into Indirect Materials. Items you consume in the shop that don't make their way into a job like sand paper, propane for the fork lift, etc. go into Shop Supplies.
Once you've got enough data, you know what percent to tack onto each job estimate for Indirect Materials and Shop Supplies. (Of course, you have a lot more overhead to add into that as well, and for tax reasons you want a bunch of other expense categories like rent, office supplies, repairs, subcontract expenses, etc. so you can't simplify too much). I tried using job costing in QB, but gave up. Too much work, and a nightmare to track items that get bought in bulk (like a unit of birch), and get dispensed over time to various jobs.
From contributor J:
Here's what I would suggest. First sit down and figure out what you want to be able to track about your business. Then take the list to your book keeper and set an appointment with him/her to discuss your list and the additional details he/she thinks you could benefit from either for assisting with your taxes or for analysis of your business. If your book keeper is a CPA they are trained to advise business owners in manners like this. Arrange to meet with your accountant quarterly to review the data you are collecting and work together to fine tune it until you reach the best balance between the realities of your time and your needs to be able to analyze your business.
My accountant and I have worked together to develop the specific categories I need to use to code all my expenses and revenues so that I can maximize my tax strategies and also better understand the effects of any changes in my business activities. Yes I have spent some money to do this but, I am trained to build beautiful furniture not to reduce my taxable income or to be able to handle the ins and outs of my financial details. I take time every Friday morning to post all my activity for the week into Quickbooks and then send an email to my CPA. She downloads my data and updates everything so that when we meet each quarter we can discuss my financials and she helps me keep things on track. We've worked together for the last 25 years and it is some of the best money I spend every year.
From the original questioner:
Thank you for all of the in depth answers. They are very helpful in that I am going to minimize the amount of accounts, highlight the areas I actually plan on studying, and ask my accountant if he has any recommendations.
From contributor M:
Don't overlook the possibility to look for another accountant or CPA if you have doubts about what you are being told. All change, but especially something like this, can be daunting. No need to ask me how I know.
From contributor I:
Yes, CPA and find the right one. Yes it is a hard pill to swallow, but worth it if you are running any kind of gross sales. Mine comes in to my office quarterly and goes over accounting with my office manager, tweaking as needed.
From contributor G:
Job cost everything. You will be surprised which projects are not profitable. Your most expensive cost is your labor, but there may be other expenses that are slowly spiraling out of control. Find a good CPA to set up your Chart of Accounts. Then have the bookkeeper maintain it. If she can't keep up, start looking for her replacement.
