Sample Chart of Accounts
I really don't like the chart of accounts that comes with QuickBooks. It has too many accounts, sub-accounts, and sub-sub-accounts. A Profit & Loss Statement is so much more useful for running your business if it doesn't break everything down into tiny little bits. I believe the most useful P&L fits on one page. If, at the end of the year, any of your income or expense categories shows a very small amount, consider combining that category into another category to keep your chart of accounts as short as possible.
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Sales & Cost of Sales
If you collect sales tax in California, you need a separate sales category for each county in which you collect tax.
Otherwise, just one category called "sales" for all monies collected from customers is fine, because the IRS doesn't want to know about the various categories of what you sell. Of course, if that information would be useful for the management of your business, have as many sales categories as you need. We will just combine them for the tax return.
Cost of Sales (a business that has no physical product should probably have nothing here)
- Items purchased for resale
- Materials & supplies & small tools used to produce a physical product
- Equipment purchased > $200 (smaller items should be included in "supplies")
- Payroll directly related to producing your product
There is no official list of tax-deductible expenses. To be deductible, an expense must be both "ordinary" and "necessary." An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. Here is a list of common business expenses:
- Accounting & bookkeeping services
- Advertising/marketing/business promotion costs
- Bank charges & fees for accepting credit card payments
- Continuing education (for your profession or just to run the business better.)
- Insurance (but not health insurance. See below.)
- Interest paid (credit cards if used only for business expenses)
- Taxes - business personal property
- Taxes - sales tax remitted to the SBE
- Taxes - federal & state company taxes (not the owner's taxes)
- Utilities paid for the physical space
More Expenses, which do need a few sub-accounts
- car expenses (gas, maintenance, insurance)
- reimbursements to employees for mileage
- parking and bridge tolls (while driving for business reasons)
- office & computer supplies (includes items < $200)
- office equipment purchases (items > $200)
- furniture purchases (items > $200)
Travel, Meals and Entertainment
- travel expenses (airfares, hotels, taxies, rental cars)
- meals (with customers anywhere, or alone while away from home on business. Refreshments for employee events also belong here.)
- entertainment (take your customer to a game!)
- health insurance paid for employees
- health insurance paid for owners
- Cash account (but try not to pay for too much with cash)
- Paypal account (if your customers pay you that way)
- Accounts receivable (if you bill your customers)
- Inventory (if you stockpile a physical product or components)
- Credit card account (a separate account for each card)
I recommend not using the accounts payable feature of QuickBooks. Almost all small businesses report their income and expenses using the "cash basis" of accounting. Running your expenses through payables will make your accounting more complex and cost you more time to clean up at year-end.
This will depend on the type of entity: sole proprietor (self-employed), partnership, corporation, or LLC (limited liability company) so ask your CPA / tax accountant for guidance.
The items listed above are not always tax deductible. Talk to your CPA.
Additional items to discuss with your CPA include:
- whether a physical inventory count is required
- special rules regarding salaries paid to business owners
This chart of accounts includes no fixed asset accounts on the balance sheet. This is because it is more useful to record current purchases of equipment in an expense account so that the bottom line tracks the taxable income more closely. If you are a sole proprietor or a one-owner LLC, you will not show a balance sheet on your tax return. Corporations, multi-owner LLCs, and partnerships should receive adjusting journal entries from their CPA to bring the bookkeeping into agreement with the tax return.
Here is a tip which will save you many headaches: always fill in the description / memo line on your checks. This information will clear up many questions when you look at the disbursement a year or two later. Example: You are looking at a payment you made to Joe Smith two years ago. You can't remember anything about Joe, and you have no paperwork filed under "Joe" or "Smith." A little hint on the memo line, such as "computer repairs" would be a big help. You run a business. You can't keep everything in your head. Be kind to yourself (and your tax accountant!) and write everything down.
If you have questions / concerns, or would like to enlist the tax services of an experienced CPA tax accountant, please contact me.
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