Income is pretty self-explanatory, but it’s also a category that is underutilized by many business owners. Most new owners start out with just one or two wide categories, like “sales” and “services.” But some types of income are easy and cheap to generate, and some require effort, time and expense, so it makes sense to create separate line items for different types of income.
Instead of lumping all your income into one account, consider what your various profitable activities may be and break them out into types of income. Don’t go wild and crazy of course, but by being able to see exactly which locations or activities are bringing in the most cash flow, you will be able to more wisely manage your business. For instance, if your store sells books, gifts, and food items, you will want to have an income line for each. Later you’ll be able to compare your cost of goods and profit levels for each category and know which type of goods are most profitable for you. The same is true for service businesses; if you sell a service, but also teach classes and do outside consulting, track your different types of income separately.
Cost of Goods Sold
Cost of Goods Sold is an account that reflects the cost of materials and goods held in inventory and then sold. When you sell an item from your inventory, Cost of Goods Sold increases by the amount you paid for that item when you purchased it. The difference between the income from the sale and the increase in Cost of Goods Sold is the gross profit on the sale of that item.
Your asset accounts will include anything you own that has value, like a building, land, equipment, vehicles, valuables, and inventory. Unfortunately, your assets may not look as pretty on your chart of accounts as they might on a real estate agent’s website. That’s because your accountant will be tracking what you actually paid for the property and its depreciation. If you want to show someone what your building, equipment, or inventory is really worth when it’s put up for sale, you’ll be using outside sources and reports for that — which is as it should be, because those values will change with the market.
Other asset accounts include accounts receivable and notes receivable. After all, you technically own that money. When someone owes you money, it’s your asset. It just hasn’t been delivered to you yet.
It’s also a good idea to break up expenses into separate accounts. Keep your categories as simple as possible, creating subcategories only when you truly see a need. For instance, if you ship a lot of products, you may want to track your costs from different shipping carriers separately. Or if you’re a cookbook author, you may want to track your food costs for recipe testing in different subcategories by book.
Remember that as your business grows, so will your need for accurate, fast, legible reporting. Your chart of accounts is your map of the past and present, and your treasure map to the future. Keep it clean and organized, and make sure that it makes sense to the most important person involved — you.