A chart of accounts is designed to help you streamline your financials. In this article we’ll look at what a chart of accounts actually is, and how you can use Xero to create a comprehensive, living chart of accounts for your business.
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What is a chart of accounts?
Your business’ chart of accounts is a comprehensive list that lives in your accounting software. This list logs all the accounts against which you can record transactions in your accounting platform.
Basically, it’s an index of all the financial accounts with which your business transacts. Each line in your business’ balance sheet is an account that’s available in your chart of accounts.
The typical information you’ll find on your chart of accounts are:
- Revenue; and
Your chart of accounts brings this information together into one central location, providing you with a snapshot of all the different accounts in your business, at one time.
Why a chart of accounts is important for your business
Your chart of accounts brings all your business information together in an easily-digestible manner. It allows you to organise your finances so you can see exactly where your money is going, and why.
How your chart of accounts works should depend on your business’ needs.
For example, if you’re a small-to-medium business, your chart of accounts should be relatively simple. You might group different income and expenses into a more condensed set of accounts.
Your chart of accounts is designed to streamline your finances, so it should be kept as simple as possible. A trap we see a lot of business owners fall into is creating multiple income and expense accounts, based on each discrete type of transaction. While this can be a good resource for understanding the granular detail of your finances, it really only serves to slow down your reporting, drawing it out.
In another example, say your business is adding a new service to your repertoire, and you’re keen to track its profitability in a separate account. You could take the granular route, and create a different account for each specific use of this new service.
Or instead, you could create one account for this new service, and log each specific use to it. It serves the same purpose, but saves you lots of time and effort.
For larger businesses, your chart of accounts will allow for a more in-depth set of accounts. We’ll have a look at how this works later in the article, and how you can tailor this depending on what you’re tracking and reporting on.
How to create a chart of accounts in Xero
Xero makes things easy for its users by having a standard chart of accounts already available for you that’s automatically populated. This is ideal for small businesses, as it's easy to start using. But it’s reasonably simplistic; larger businesses may need a more in-depth approach.
To view your chart of accounts:
- Go to the Accounting menu, select Advanced
- Click on Chart of Accounts, and there you go.
Your chart of accounts will be split into these categories:
- Revenue; and
Each of these categories can be broken down further into its different type of account.
For example, your Revenue category might include:
- Other Revenue
- Rental Income
- Interest Income
So for smaller businesses, you can see that it might be enough to use a single Sales account. And as your business grows, you're able to break this down further. One big benefit of your chart of accounts is that it’s customisable, so you can get the level of utility out of it that you need.
Components you’ll find in your chart of accounts
Here are the key components you can expect to find in your Xero chart of accounts.
As we said earlier, your chart of accounts will be split into the following sections, which will usually fall into the attached account codes:
- Assets (600-799)
- Liabilities (800-899)
- Equity (900-999)
- Revenue (200-299)
- Expenses (300-499)
These ranges aren’t concrete, but it’s always best to have a set range for the different sections. This makes it much clearer to read, and easier for you to find the accounts when you’re looking through the chart.
Name and description
The name of the account is what appears on your profit and loss or balance sheet. These can really be anything, but it’s best to use a logical naming convention, to make it easier—and less time-consuming—to read and understand.
The description is for your internal use, so it’s good to make it a clear outline of what the account is used for. This will be useful for any new staff working on the file, or for your bookkeeper to get a clear understanding of each account.
The tax rate will be pre-populated as a default rate when an account is reconciled, so it’s important that you set the right tax rate manually prior to this. While you can do it during reconciliation, it can be slow-going, so it’s recommended to do this beforehand.
Year to date
One useful function in your Xero chart of accounts is the Year to Date. This column shows you the total number of transactions in dollar figures allocated to this account for the year, providing an easy up-to-date overview.
Other useful Xero chart of account functions
Xero can import and export your chart of accounts from other platforms, which makes it easy to migrate your data to Xero. This allows you to keep the same codes and naming conventions as used in your previous system, with just a few clicks.
Exporting your data is useful when you’re setting up a new office, branch, or similar business entity and you want to use a similar chart of accounts format.
Archiving old accounts
You can choose to archive an account if it’s no longer in use. Archiving the account doesn’t impact any historical reporting, it simply means that you can’t allocate any new transactions to that account. You don’t lose any data.
The final word
Creating a chart of accounts in Xero is easy, and goes a long way towards streamlining your finances and bookkeeping.
But as your business grows, you might need to expand your chart of accounts. In this case, we recommend contacting a Xero accounting specialist.