A well-designed chart of accounts for a service business limited liability corporation, or LLC, allows for easy reporting and income tax preparation. The chart of accounts is a catalog of all accounts to be used by a business during the year. It’s organized to provide a centralized place to accumulate financial information. The accounts are generally identified by numbers and a brief description, such as 1010 Cash – Bank of America, 2010 Accounts Payable and 5020 Insurance Expense.
Verify what reports you need.
A proper chart of accounts for a business service LLC should provide information for reporting internally and to external parties. You first identify what you need for tax returns and then set up the chart of accounts around this need. Then, check out other government reports, such as sales tax or equipment reports and be sure the chart of accounts can help you in these processes. If management or investors need a specific financial report, be sure that the accounts setup in the chart can be compiled to create such a report. You may need to separate sales by type or to provide more granular information, such as sales by locations, or sales by type and you will need to create separate accounts to accumulate data in this fashion.
Assets, liabilities and equity accounts
Set up balance sheet accounts in your chart of accounts, such as assets, liabilities and retained earnings. Identify ranges for assets, such as from 1000 to 1999. Liabilities could run from 2000 to 2999 and retained earnings would run within the 3000 to 3999 range. As you create accounts, use these ranges to keep the accounts straight. Within the assets, you should have at least one cash account, which could be a 1001 Cash – Bank Alliance. Don’t set up a liability account using the range for assets, or you will end up with a mess. If you’re not clear about what accounts to create, search for a balance sheet template online to get ideas.You can also review your tax return for balance sheet accounts.
Income and expense accounts
Create income statement accounts in your chart of accounts. These are revenues and expenses related to the service business. You decide on an account range for your revenues, such as 4000 to 4999 and set up these accounts within this range. For example, a service revenue account would be 4001 Consulting Revenue account. Expenses would have a range of 5000 to 7999 and are created to track expenses separately. For example, if you pay for rent, office supplies and insurance, these transactions are recognized in three different accounts, such as 5010 Rent Expense, 5003 Office Supplies Expense and 5010 Insurance Expense. Don’t use the same account number on more than one account. If you’d like to know what accounts belong to the income statement, take a look at your own business tax return or at the Internal Revenue Service Form C, filed with a 1040.
Note that commas are not used with account numbers.
Creating a chart of accounts can be a challenge, but doing it on a systematically way will help you get the results you need. You could test your chart of accounts by running reports and making sure information is placed in the right spots. You could also have an accounting professional review your chart of accounts before you start using it.
Sheila Shanker CPA, MBA, based in Southern California, is a consultant with over fifteen years of solid experience in many industries, including nonprofit organizations. Her latest book, “Nonprofit Finance: A Practical Guide” was published in 2015. Sheila writes online self study CPE courses, and her articles have been published online and in national magazines, such as “Journal of Accountancy”, “Nonprofit World”, and “Architecture Business and Economics”. You can contact her at her website www.webshanker.com.