In order to have flexibility in organizing your income and expenditures, proper classification of your earnings and expenses is essential for proper bookkeeping. Your business is unique and not necessarily every element will belong to predetermined classifications. Consequently, to achieve professional and accurate financial statements, it is important to understand the industry standards relevant to your niche. Analyzing prior tax returns, classifying asset purchases, and using simplifying accounting programs are just a few examples of smart ways to help save financial statements from turning into a mess that is likely to stress a business owner.

Chart of Accounts: Purpose & Function

A Chart of Accounts (“COA”), is an accounting tool that provides a complete listing of every account in an accounting system; thus enabling better financial organization. This means every unique record for each asset type, liability, equity, revenue and expense is accounted for in one statement and broken down into subcategories.

The accounts a company identifies and makes available for recording transactions in its general ledger constitute a COA and every company generally has the flexibility to tailor its COA to best suit its needs.. For small businesses, classifying expenses into the proper category can be incorporated into routine processes, such as bill payment, but extensive classification can get more complicated.
You can reduce the work of preparing financial statements or tax returns at year-end by using leading accounting software and experienced and talented accounting specialists. Some of the thing you can do to enhance you accounting practices includes:

• Familiarization with your specific industry's standards;
• Using reliable accounting programs to appropriately classify expenses;
• Modeling expense line items after tax returns; and
• Seeking greater understanding of capitalization of asset purchases.

The typical COA for a small to medium sized business might include such items as:

• Inventory assets;
• Company credit card, checking account or savings account;
• Undeposited funds and petty cash balance;
• Accounts receivable and stock holders’ equity;
• Payroll liabilities; and
• Vehicles or buildings.

The bigger and more intricate your business operations become, the more comprehensive your COA tends to be. Our COA is one such tool and it’s now available for download at your convenience. The COA makes it simpler and easier for you to categorize accounting entries correctly and maintain accurate and organized records.

The Pitfalls of Misrepresenting Earnings and Expenditure

Without proper guidance or effective tools, you can easily find yourself inadvertently breaching best practice standards or undermining your business obligations due to inaccurate financial reporting. Some of the serious risks facing businesses because of not categorizing revenues and expenditure properly include:

• Inaccurate reporting that leads to higher tax liability;
• Incurring due diligence costs that do not yield financing;
• Irreparable reputational damage;
• Failure of an otherwise lucrative venture through fines and trade license revocations;
• Inaccurate tracking of expenses, debts and creditors;
• Access to finance barriers;
• Time loss and higher accountancy costs;
• Missed tax payments and other tax violations; and
• Receipt of the wrong amount of benefits or credits.

Other more sophisticated and less obvious problems that can arise include:

• Increased vulnerability to fictitious revenue schemes;
• Improper recognition schemes;
• Inventory schemes;
• Accounts receivable schemes;
• Understatement of liabilities;
• Overstatement of liability reserves;
• Improper or inadequate disclosures; and
• Misappropriation of assets and fraudulent disbursements

Whether you intend to secure credit or investment for your enterprise, the analysis of your company’s financial statements relies heavily on the accounting data recorded in your financial reports. Not keeping adequate records or failing to keep records for required periods of time and result in fines and inaccurate tax returns. Flawed financial statement adjustments can lead to drastically altered business life cycles. It is therefore of great importance to make sure that your financial reports translate the company’s performance and financial state on paper without materially misrepresenting results.

Finding the Right Solution

Ideally, your company's organizational structure should serve as the outline for your accounting COA. For example, if your company divides its business into several departments, each serving a different function, this may result in each department having autonomous accountability for its own revenues and expenses - salaries, office supplies and the like. Remember that while most revenue and expense accounts that need to be set up are common to all businesses, some depend on the type of business and how that business is structured. When initially structing your businesses COA, it is best to fit the COA into the structure of your business which can generate financial information on each department.

A COA is normally arranged according to major account types. The Balance Sheet Accounts include assets, liabilities, and equity while the Income Statement Accounts lists operating revenues and expenses. Within these primary categories of operating revenues and operating expenses, accounts can also be further organized by business function or by company divisions, product lines, etc.
The Income Statement portion of a COA usually lists Revenue Accounts followed by the Expense Accounts. The revenues are grouped or classified based on whether they are related to the normal operations of the business called ‘Operating Revenue’ or result from incidental activities called ‘Non-operating Revenue’. In the same manner, expenses are grouped or classified based on whether they are related to the normal operations of the business called ‘Cost of Goods Sold’ and ‘Operating Expenses’ or result from incidental activities called ‘Non-operating Expenses’.

Using the GMAC Chart of Accounts

Using similar classifications as those listed on IRS tax forms, we go the extra mile to understand your business objectives and requirements to then tailor your COA to better suit your particular agenda. Our COA has built-in expense categories which make compiling financial statements easier. The reporting features also allow for further customization. Our team is favorably positioned to serve all your accounting needs and utilizes the best accounting tools to properly classify expenses. Our professionals are QuickBooks and Xero certified and experienced with different software applications. Our strategic positioning allows us the versatility necessary to address various industries' expense classifications.

GMAC Accounting primary focus is on finding first-rated solutions that make bookkeeping less tedious by setting up automatic bank feeds so that every transaction is accounted for. In addition, billing and invoicing is provided for so that you don’t have to be concerned with vendor payments or bill collections. You can also rest assured that your accounts receivables and payables are in order. Furthermore, you can a no hassle payroll set up so that you don’t end up with disgruntled staff or unmotivated personnel. Lastly, we’ll ensure your business intelligence reports are safeguarded and that you have all the insights needed to stay competitive and responsive to market changes.

A good financial strategist employs the best approach to preparing financial statements and setting accounting policy. With GMAC Accounting, you can be confident in having qualified, flexible and equipped virtual accounting and bookkeeping professionals who thoroughly understand revenue streams and disbursements. Our tool accounting tool will help you monitor the progress of your business, prepare your financial statements, identify income sources income, and keep track of your deductible expenses.

To start getting your books in order, simply download our COA here. Should you wish to have a further discussion with our expert team about your financial statements or any other inquiries, please contact us or leave a comment below and we’ll be happy to assist.


This article is brought to you by GMAC Accounting, LLC, a full service cloud accounting and bookkeeping firm. With over 30 years of experience in the business of banking, accounting and project management, GMAC assists small and mid-sized businesses with all their financial needs. For more information on GMAC Accounting, please visit: www.GMACAccounting.com