Small Business Accounting:
How to Determine the Accounts your Business Needs

The most important question to be answered, in the process of determining your account listing need, is what type of business you operate.  Professional and service industries generally use a completely different set of accounts, to say, a manufacturing or retail sales business.

All account listings however, share some general characteristics.  They are divided according to the account type, asset, liability, equity, income, and expense.  In establishing your accounts, you may choose to work with your accountant, as the account listing represents a combining of accounting knowledge and business knowledge. 

The asset accounts would be your accounts receivables, cash, savings, notes receivable, prepaid expenses, and property.  Accumulated depreciation accounts are grouped with your asset accounts and usually directly behind the asset to which they apply.  For instance, if you have an asset account entitled “Vehicles”, directly beneath that account you would find an account entitled “Accumulated Depreciation – Vehicles”.

The liability accounts would include accounts payable, sales tax payable, payroll taxes payable, accrued wages, notes payable and accrued income taxes.  The liability accounts are generally some of the more difficult accounts to reconcile, simply because payroll transactions, income tax transactions, and sales tax transactions are quite complex, with many entries.

Capital, or equity, accounts are not many.  There are only just a few ways to list owner equity, common stock, preferred stock, and retained earnings.  In addition, the reconciliation of these accounts is usually quite simple because there may be only one or two transactions per month that affect these accounts.

The final two grouping of accounts are the accounts that are used to create the Income statement, or the Profit and Loss Statement.  The Income and Expense account listings are directly affected by the type of business you operate, and the expenditures your business will have over the course of its operation.  Some businesses will need an account entitled “gross sales”; other businesses that are service oriented will need an account entitled “fees earned”.  Both accounts represent the income of the business operations, but due to a difference in the product marketed, the income is titled in a completely different way. 

Expense accounts, again, will vary depending upon the nature of the business.  Areas such as “cost of goods sold” and “contract labor fees” may refer to the money spent in the production of the items sold, or the services sold.  They are however, categorized with completely different account titles.  Some of the standard expenses for a facility that actually creates a viable, physical product will not be needed at all for a lawyer firm, or a doctor’s business.

Some of the more common, and generally shared accounts, would include utility expense, repairs, telephone, travel expenses, and wages.

If you’re a beginner with account setup, here’s a shortcut idea:  Look at last month’s or last year’s financial statements.  Use the account titles listed there to set up your own account listing.  You will find those accounts to be the most useful in your business, and your accountant has already given you a list to work with.

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