Sample Chart of Accounts

Sample Chart of Accounts

I really don't like the chart of accounts that comes with QuickBooks.  It has too many accounts, sub-accounts, and sub-sub-accounts.  A Profit & Loss Statement is so much more useful for running your business if it doesn't break everything down into tiny little bits.  I believe the most useful P&L fits on one page.  If, at the end of the year, any of your income or expense categories shows a very small amount, consider combining that category with another category to keep your chart of accounts as short as possible.

Sales & Cost of Sales

Sales
If you collect sales tax in California, you need to track your sales by county.

Otherwise, just one category called "sales" for all monies collected from customers is fine, because the IRS doesn't need to know about the various categories of what you sell.  Of course, if that information would be useful for the management of your business, have as many sales categories as you need.  We will just combine them for the tax return.

Cost of Sales (a business that has no physical product should probably have nothing here)

  • Items purchased for resale
  • Materials & supplies & small tools used to produce a physical product
  • Equipment purchased > $500 (smaller items should be included in "supplies") But see note below.
  • Payroll directly related to producing your product

Expenses

There is no official list of tax-deductible expenses.  To be deductible, an expense must be both "ordinary" and "necessary."  An ordinary expense is one that is customary and accepted in your field of business.  A necessary expense is one that is useful and appropriate for your business.  An expense does not have to be indispensable to be considered necessary.  Here is a list of common business expenses:

Expenses

  • Accounting & bookkeeping services
  • Advertising/marketing/business promotion costs
  • Bank charges & fees for accepting credit card and PayPal payments
  • Commissions paid out
  • Continuing education (for your profession or just to run the business better.)
  • Dues & subscriptions
  • Insurance (but not health insurance.  See below.)
  • Interest paid (credit cards if used only for business expenses)
  • Janitorial service
  • Legal fees
  • Postage & delivery
  • Printing
  • Rent - physical space
  • Rent - equipment
  • Rent - storage space
  • Repairs - equipment
  • Repairs - physical space
  • Security service
  • Taxes - business personal property
  • Taxes - sales tax remitted to the SBE
  • Taxes - federal & state company taxes (not the owner's taxes)
  • Telephone
  • Utilities paid for the physical space
  • Web site costs

More Expenses, which do need a few sub-accounts

Car Expenses (discussion of business mileage allowance method)

  • car expenses (gas, maintenance, insurance)
  • reimbursements to employees for mileage
  • parking and bridge tolls (while driving for business reasons)
  • car loan payments

Office Supplies, Equipment and Furniture

  • office & computer supplies & small equipment
  • office equipment purchases (items > $2500) But see note below
  • furniture purchases (items > $2500) But see note below

Travel, Meals and Entertainment

  • travel expenses (airfares, hotels, taxies, rental cars)
  • meals (with customers anywhere, or alone while away from home on business). 
  • meals and refreshments for employee events at your place of business.
  • meals for employees at your place of business for your (the employer's) convenience
  • entertainment (take your customer to a game!)  Update: the the business entertainment tax deduction is no longer available for federal taxes.  But California has not conformed, so the state tax deduction is still available.

Payroll

  • wages paid to employees
  • wages paid to owners
  • payroll taxes paid
  • payroll processing fees
  • health insurance paid for employees
  • health insurance paid for owners

Balance Sheet

Assets
  • Cash account (but try not to pay for too much with cash)
  • Checking account(s)
  • PayPal account (if your customers pay you that way)
  • Accounts receivable (if you bill your customers)
  • Inventory (if you stockpile a physical product or components)

Liabilities

  • Credit card account (a separate account for each card)

I recommend not using the accounts payable feature of QuickBooks.  Almost all small businesses report their income and expenses using the "cash basis" of accounting.  Running your expenses through payables will make your accounting more complex and cost you more time to clean up at year-end.

Equity
This will depend on the type of entity: sole proprietor (self-employed), partnership, corporation, or LLC (limited liability company) so ask your CPA / tax accountant for guidance.

The items listed above are not always tax deductible.  Talk to your CPA.

Additional items to discuss with your CPA include: 

This chart of accounts includes no fixed asset accounts on the balance sheet.  This is because it is more useful to record current purchases of equipment in an expense account so that the bottom line tracks the taxable income more closely.  If you are a sole proprietor or a one-owner LLC, you will not show a balance sheet on your tax return.  Corporations, multi-owner LLCs, and partnerships should receive adjusting journal entries from their CPA to bring the bookkeeping into agreement with the tax return.

Important note:  The de minimus safe harbor amount for deducting tangible "units of property" has been raised to $2,500 if that has been the company's policy for the entire year.  The policy does not have to be written.  A written election is required with the tax return.  For most companies, bonus depreciation and Section 179 deduction makes this unnecessary.

Here is information on what tax papers you need to keep (bank statements, credit card statements, paid invoices, etc.)

Here is a tip which will save you many headaches:  always fill in the description / memo line on your checks.  This information will clear up many questions when you look at the disbursement a year or two later.  Example:  You are looking at a payment you made to Joe Smith two years ago.  You can't remember anything about Joe, and you have no paperwork filed under "Joe" or "Smith."  A little hint on the memo line, such as "computer repairs" would be a big help.  You run a business.  You can't keep everything in your head.  Be kind to yourself (and your tax accountant!) and write everything down.

I like to print out paper copies of credit card statements.  For audit purposes, you need both a bill/invoice and proof of payment.

If you have questions / concerns, or would like to enlist the tax services of an experienced CPA tax accountant, please contact me.

M. Bess Kane, CPA   
bess@besskanecpa.com
November, 2020