Demystifying the Chart of Accounts for your handmade business. The Chart of Accounts – that’s accounting speak for your handmade business for the way that CPA’s, tax professionals, and business advisors organize financial data about your company.
A Chart of Accounts, or COA, is a complete list of all the accounts or money buckets involved in your business’s day-to-day operations. But it’s organized into categories that feed information into two very important business financial reports – the Balance Sheet and the Profit & Loss or Income Statement.
Picture your handmade business as a treasure trove of financial data, and the Chart of Accounts as your trusty organizer. Just like we sort our crafting supplies into plastic storage organizers, CPAs, tax pros, and business advisors use the Chart of Accounts to sort our company’s financial information.
In this post you’ll discover the secrets of mastering accounting speak and managing finances in your handmade business. Dive into our post on demystifying the Chart of Accounts—a vital tool for creative entrepreneurs. Learn to organize your financial data with ease and gain control over your handmade, creative, or craft businesses financial destiny.
So, What Exactly Is This “Chart of Accounts”?
A Chart of Accounts, or COA, is a complete list of all the accounts/or money buckets involved in your business’s day-to-day operations. But it’s organized into categories that feed information into two very important business financial reports – the Balance Sheet and the Profit & Loss or Income Statement.
Think of the Chart of Accounts, COA, as a filing system where you enter all of your company’s financial information.
It answers the important questions of:
- where is the money going,
- and, where did the money come from to begin with.
In the world of general bookkeeping and accounting principles, every item on your Chart of Accounts should have its own unique Account Number or Name. This number or name finds its place in your General Ledger book, ensuring that your financial affairs are well-organized. Depending on the type of account, these numbers and names follow a specific sequence.
NOTE: Numbers are not as commonly used today as they used to be, however, there are still some CPA’s and other tax professionals that still like to use them.
Typically, a chart of accounts has eight (8) main account categories with the possibility of many subaccounts.
Here’s how the Chart of Accounts numbering or naming system breaks down.
First we’ll look at the three (3) Chart of Accounts categories that feed information into the Balance Sheet, which tells you how much your business is worth.
- 10000-19999 or Assets – These are the tangible and intangible things things that your handmade business owns that has value. Such as: money in the bank and inventory.
- 20000-29999 or Liabilities – This category deals with the money your handmade business owes to others. This includes things like credit card balances and sales tax payable.
- 30000-39999 or Equity – It’s the difference between what you have (your Assets) minus what you owe (your Liabilities) plus money you’ve put into your business and profits the business has made MINUS money you’ve taken out of the business.
Next, we’ll look at the five (5) Chart of Accounts categories that feed information into the Profit & Loss or Income Statement, which tells you whether or not you business made or lost money.
- 40000-49999 or Income (Revenue) – Money you’ve received (earned) from selling your handmade items and/or patterns.
- 50000-59999 or Cost of Goods Sold – All of the costs you’ve incurred in making and selling your handmade items. Such as money you pay for merchant account fees and small tools.
- 60000-69999 or Overhead Expenses – The expenses you’ve incurred to run your business that do not involve making your finished items. This would include things such as advertising and website expenses.
- 70000-79999 or Other Income – Money you’ve earned that doesn’t come from selling your handcrafted items. This would include things like ad revenue or commissions.
- 80000-89999 or Other Expenses – Expenses that are outside of your normal business operations
Imagine this as your finished items inventory system – each section has it’s own unique spot and content.
For instance, in your General Ledger, you’d have a page (or a worksheet) for:
- 10000 Checking Account (Asset): Here you record the dollars you’ve deposited and spent.
- 13000 Yarn Purchases (Inventory and an Asset): This helps you track of the value of your ever-growing yarn stash.
- 40001 Etsy Sales (Income or Revenue): This account tracks income solely from Etsy Sales.
- 40002 Craft Fair Sales (Income or Revenue): It keeps tabs on income generated from Craft Fairs
- 40003 Ravelry Sales (Income or Revenue): Here, you record income from Ravelry Sales.
- 50000 Merchant Account Fees (Cost of Goods Sold): Here you would record the fees you pay to Etsy, PayPal, etc. for collecting the money you receive from selling your handmade items.
- 69000 Website hosting (Overhead Expenses): Records expenses related to building or maintaining your website.
- 70000 Ad Revenue (Other Income): Here, you record income from Google Ads, Share-A-Sale, etc..
If you’re using a paper General Ledger or a massive Excel/Google Sheets workbook with different sheets for each account. You know it it will involve a lot of updating and formulas.
Fear not!
Accounting software can make managing your handmade business’s bookkeeping a breeze. You can even use a single income account and rely on other features to track the sources of your sales! That’s a topic for a future post.
That’s all for this time. Stay tuned for our next discussion on Assets and what they mean for your handmade business.
[…] Accounting software such as QuickBooks, will automatically keep track of the Sales Tax that you charge and collect from customers – if it’s set up properly – and keep track of it in an Other Current Liability account called Sales Tax Payable in the Balance Sheet section of the Chart of Accounts. […]
[…] That’s enough accounting speak for your handmade business for this week – next week we’ll talk about the Chart of Accounts. […]