When setting up a new accounting system, usually you start with the
Chart of accounts. But what is the
Chart of Accounts?
Definition on the Internet says:
The chart of accounts is a listing of all accounts used in the general ledger of an organization.
What does this even mean? Well, let’s look at a sample balance sheet which is a key financial statement that will be required for your business:
A balance sheet is a report of the assets and liabilities of a business. Every asset or liability is represented by an account. For example:
Accounts receivablesaccount represents the amount owed by customers.
Inventory on handaccount represents stock on hand, valued at cost.
Cash & cash equivalentsaccount represents the balance of all bank accounts and cash on hand.
Accounts payablesaccount represents the amount owed to suppliers.
Typically you would set up your
Chart of accounts so every significant asset or liability of a business is represented by an account.
Chart of accounts is not just about assets & liabilities. It’s also about income & expenses. Income & expense accounts won’t show on the
Balance sheet. They will show on another report named
Profit & Loss Statement.
Chart of accounts will therefore determine the presentation of these reports. You setup your accounts, then you post transactions to these accounts and then you can generate financial statements like the above examples.
When you create a new business in Manager, a few income & expense accounts will automatically be created. You can go to
Chart of accounts to rename or delete existing accounts or create new ones. In order to do that, go to the
Then click on
Chart of Accounts.
This will take you to the list of your accounts.
As you can see, the screen will be divided into two parts:
- Balance Sheet (left side)
- Profit & Loss Statement (right side)
So this is where you can set up your accounts for the financial statements.
You will notice that Manager creates sample income & expense accounts but except for
Retained earnings, it doesn’t create any account by default on the left side. This is because the types of assets and liabilities is significantly different for every business while many income & expense accounts are common to the majority of businesses. For example, we all incur
But how do you add new accounts? Let’s say the business we are creating has one more income source - commission.
Since it is an income account, to add this account, click
New Account under
Profit & Loss Statement section.
Then enter the name and select
After you click
Create button, your new income account (or income category) will be shown in your
Chart of Accounts.