The key to managing your business’s financial results lies in reviewing and understanding your financial statements. Statements which are disorganized or difficult to read are a barrier to sound financial oversight.
Here are our five best tips for crafting a Chart of Accounts which will result in a Profit and Loss statement that is easy to read and interpret:
1) Consider separating revenues for different lines of business.
Does your business include more than one distinct type of income, such as different product lines or service types? Each time you set up a product you have the opportunity to point it to a different income account. This allows you to post related products to their own distinct income line on your Profit & Loss statement, giving you a nice overview of where the money is coming in and which sales lines have opportunities for growth. This is not to suggest that your 20 different products should appear on 20 different income lines – find the sweet spot that allows you to separate lines of business in 2-5 broad strokes. You can always use the Sales by Product report to review sales at a more granular level.
2) Enable Account Numbers
By default, your Profit and Loss statement lists your accounts first by account type (Income, Cost of Goods Sold, Expense, Other Income, and Other Expense) and then alphabetically within each account type. To make your results more readable, consider enabling account numbers. Numbered accounts will list numerically rather than alphabetically, so numbering your larger dollar accounts with lower account numbers will display them closer to the top of Profit and Loss statement for some visual POW!
3) Create Sub-Account Groupings
You have the ability to create sub-account groupings which generate additional subtotals within the Profit and Loss report. Use this power to create logical groups of Sales and Expenses. For example, your expenses can be grouped into Staffing, Office/Administration, Marketing and Financing subtotals. There are a couple of cautions: Watch out for default groupings that already exist in QuickBooks™; for example, you don’t need to create a group for overall Income since all accounts of the type “Income” will already total for you. The other caution is that although you can make smaller groupings within a group (i.e. sub-accounts of sub-accounts), you then run the risk of making your Profit and Loss statement too fragmented, with multiple layers of subtotalling. Less is more!
4) Use a Combination Approach
Your Income and Expense account groups should ideally sort with the highest dollar value groups near the top where they are most visible, so if your largest expense is staffing costs and your second largest is marketing costs, create groupings for these and give the Staffing Costs header account a lower number such as 6100 while the Marketing Costs header can be assigned the number 6200. Whether you wish to add numbers to the sub-accounts under each heading (6101, 6102) to also sort the sub-accounts within the group is up to you.
5) Get Expert Help
Contact BookSmarts today for help with your Chart of Accounts organization. We are certified QuickBooks™ advisors and professional accountants. We can help you to find the questions and the answers when it comes to creating financial statements that are both readable and informative.
A self-professed ‘accounting geek’, Michele is a Chartered Professional Accountant and Certified Management Accountant with over 25 years’ experience in implementing and managing accounting systems. She is a certified trainer for adults and has attained Elite status as a QuickBooks™ ProAdvisor.