If you're a start-up Managed Service Provider (MSP) trying to get your financial ducks in a row, it's imperative to first determine the financial health of your organization. This is where establishing a coherent chart of accounts, otherwise known as "the foundation of financial reporting," is sure to pay...
...here at Wise-Sync, we understand how overwhelming that might sound, especially when you just don't know where to begin, which is why we're here to help.
Here, we provide your best practices starter guide for creating a chart of accounts.
Simply put, it's easier to think of a chart of accounts (COA) as a financial directory into your organization; it provides a complete listing of subcategorized accounts, all of which, specifically pertain to what's listed within the general ledger of your organization. Here, an 'account' refers to a distinguished documentation of a liability, revenue, asset, equity, or expense.
In case you're wondering what a general ledger is, it's basically the grand set of accounts which provides a record of every transaction that's taken place within your organization.
The chart of accounts is typically structured in the same way accounts are listed via the balance sheet, followed by the order of accounts within an income statement, alternatively called a profit-and-loss statement.
Imagine a potential investor walks into your business, and asks, "Is your business healthy?" How would you respond? Well, having a structured chart of accounts provides the insights you need to formulate a grounded answer.
If you've been keeping up-to-date with our MSP Best Practice accounting series, we're hoping you've gained a better picture into how a business determines their financial health; we covered How to Read a Profit and Loss Statement, a Balance Sheet, and a Cash Flow Statement.
These three interdependent financial statements go hand-in-hand with the chart of accounts. In accordance with best practices' guide for creating a chart of accounts, a standardized chart of accounts will list accounts in an order that mirrors the structure of your balance sheet, followed by those accounts listed via your profit-and-loss statement.
Throughout our several years' experience in consulting and onboarding, we've assisted a significant number of start-up and one-man MSPs alike, who possessed a fluent understanding of the Professional Services Automation (PSA) world, but reportedly felt somewhat helpless when it came to the accounting side.
If your business is just setting up Xero or QuickBooks Online, or is an entirely new company starting from scratch, you'll need to be able to break out your revenue and Cost of Goods Sold (COGS) into useful income categories, or "buckets" as US residents might call it, within your chart of accounts.
To do so, our consulting team recommends getting started with the following income categories (especially if you're building a business for sale):
That concludes our best practices starter guide for creating a chart of accounts, though if you're still feeling unsure and could use an extra hand - we're always here to help. When onboarding with Wise-Sync, our consultants can teach you how to organise your revenue and Cost of goods sold (COGS) within your chart of accounts. We hope this article has helped you to gain a basic understanding of the chart of accounts, stay tuned for our upcoming article next week.
DISCLAIMER: This article is general in nature. If you wish to apply this information to practical circumstances, we strongly advise you seek professional accounting advice to ensure interpretation is both clarified and expert-led to suit your individual business needs.
Wise-Sync provides a streamlined and stress-free solution for integrating ConnectWise Manage or Datto Autotask PSA to Xero and QuickBooks Online. With Wise-Sync, long gone are the days of double entry, painful procurement and endless data errors because now, at just the click of a button - you can balance your books and revel in the greater financial visibility and improved cash flow that every MSP desires. Some call it “magic”, we call it Wise-Sync.
To find out more about how we can help you, speak to our friendly team today.
