Setting Up the Chart of Accounts

Setting up your chart of accounts needs thought and some understanding of what you “need” to know versus what you “want” to know. The IRS has not accepted one form of accounting system over another. The only requirement is that you keep records and have proof available for those records should you be audited.

So what system is best? The answer is easy – the one you will use regularly and that will give you the information and proof you need for tax purposes. That’s the “need side”. The information that will help you make better business decisions is the “want side.”  Although both are related in similar ways, the “want side” is the ever changing area of your financial record keeping.

“Need to know” covers such items as:

  • how much money is in your bank account or is owed to the bank
  • the amount that your customers owe you or the amount you owe your creditors
  • what your tax preparer needs at year end

“Want to know” covers such items that:

  • more detailed account of type of advertising or other expense
  • more detailed breakdown of type of income (i.e. taxable or nontaxable, consulting or product sales)

Keep the chart of accounts simple to start with. Begin by setting up the accounts you “need to know“. Use names for the accounts that remind you what type of transaction gets recorded in that account. For example, instead of “bank account”, use “checking account” and maybe add the bank name if you have more than one account.

There are several areas to review when setting up a chart of accounts (listing of accounts). First, if your business filed a tax return last year, review the return (for sole proprietors that is your Schedule C). Next, look over your business checking account or business credit card purchases to determine where you spend your money. Both of these will give you an indication of what accounts will be need. (To request a chart of accounts sample email me.)

Once you have decided on the accounts, you will need to determine what system to use. The easier it is to use, the more regularly you will do the book work. Start by setting up a system to organize your receipts by account. This is the system you use to temporarily hold the receipts you haven’t recorded. For recording your receipts and other transactions, there are columnar pads or other bookkeeping journals out there to start by hand. Each system will have columns and each column is an account. Leave a column for date and an area for description of the expense. By hand, I suggest two columnar pads or a journal that separates income from expense. I prefer the journals, remembering if an account that you need can always be added or substituted for one you don’t need.

Computer bookkeeping systems are more readily available and do the math for you, therefore tend to be more accurate. Excel or a spreadsheet program setup isn’t expensive and doesn’t need upgrading as often as some of the bookkeeping systems. It also works like the handwritten journals or pads.

Peachtree Vs. QuickBooks

QuickBooks and Peachtree are the most commonly used computer systems.  Both systems are easy to use with each having pros and cons. Peachtree has you close on time period before being able to make entries into a new month. It does allow you to return to closed periods back as far as the prior year. QuickBooks doesn’t close prior years to where you can no longer use them or get the information. It also works more like a spreadsheet program when trying to sort information on reports.

When using either of these or another software product, you should always find someone who knows the system and have them come in and help you with setup and training on the program. It will make it easier for you to use and will prevent problems arising at tax time that will cost you more time or money to correct.

Do have software questions or need help setting up a system you can understand? Simple Office Solutions can help! We provide one-on-one training which includes on-going telephone support for those moments you get stuck.


Jennifer Thompson
(715) 559-4664

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