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4 min 51 sec
0:00
Maya's shoebox
0:32
The five types of account
1:25
Balance sheet and P&L
1:59
What a chart of accounts is
2:22
Sorting the shoebox
3:10
Keep it simple
3:33
The chart in Beeswax
4:10
Recap and quiz
Accounting 101
·
Foundations
·
Episode 2
The Chart of Accounts
(Five drawers. No actual chart.)
Maya's shoebox of receipts meets the five types of account. Learn which live on the balance sheet, which on the profit and loss, and how a chart of accounts files them all.
chart of accounts
account types
balance sheet
profit and loss
Transcript
0:00
Month two at Northlight Studio. Maya has invoices going out, rent going out, a credit card doing most of the heavy lifting, and a shoebox.
0:11
Every business ends up with a shoebox. The question is, what goes where?
0:18
Today, the five types of account, and the list that holds them all. It's called the chart of accounts. There is no chart. We'll get to that.
0:32
Last time, we met three of them. Assets: what you've got. Liabilities: what you owe. Equity: what's actually yours.
0:41
But Maya's equity went up when she got paid, and down when she bought software. So what exactly was moving it?
0:49
Two more types. Income: money you've earned. And expenses: what it cost you to earn it.
0:57
Income minus expenses is profit. And profit, as we saw, belongs to the owner. So these two are really just equity, wearing a name badge.
1:07
Which gives us the full family. Assets. Liabilities. Equity. Income. Expenses. Five. That's all of them. Every transaction in every business on Earth goes into one of those five. Even the weird ones.
1:25
And they split neatly into two teams.
1:28
Assets, liabilities and equity live on the balance sheet. That's a photo. What you've got, and what you owe, on one particular day.
1:39
Income and expenses live on the profit and loss. That's a film. What happened, over a month, or a year.
1:47
Photo. Film. If you remember nothing else today, remember that. Actually, remember a bit more than that. But it's a good start.
1:59
Now, the chart of accounts. It's simply a list of every account the business uses, each one filed under one of the five types. Think of it as a filing cabinet, with labelled drawers.
2:12
Why is it called a chart? Honestly, nobody knows. It's a list. Somebody named it centuries ago, and nobody's had the heart to tell them.
2:22
So, let's sort Maya's shoebox.
2:25
Money in the business bank account. An asset.
2:29
The cafe still owes her for last month's work. That's money owed to her, so it's an asset too. Accountants call it trade debtors, or accounts receivable, depending on which side of the Atlantic they had lunch.
2:44
The credit card balance. She owes that. Liability.
2:49
The four thousand she invoiced for a new website. Income.
2:54
Co-working rent, software, and the freelance developer. Expenses. All three.
3:01
And her original ten thousand? Equity. Still hers. Just a bit more tired.
3:10
One piece of advice. Keep it simple. You want enough accounts to tell you something useful, and not so many that you need one for biscuits. Chocolate. Other.
3:25
Twenty or thirty accounts is plenty for most small service businesses. If you've got four hundred, something's gone wrong.
3:33
Here's the good news. Beeswax sets up a sensible chart of accounts for you, the moment you create your business.
3:40
A bank account, and a credit card. Retained earnings, for the profit you keep. Services, for the work you invoice. And the usual expenses. Rent, software, contractors, wages.
3:53
Need another one? Click new account, give it a name, and pick one of the five types. That choice matters, because it decides which report the account lands on.
4:03
Pick wisely. Or at least, pick something. You can tidy it up later. We all do.
4:10
So. Five types of account. Three on the balance sheet, the photo. Two on the profit and loss, the film. And a chart of accounts that is, sadly, not a chart.
4:23
Quick one. Maya takes a client out for coffee, to talk about a new project. Which type of account?
4:29
Have a think.
4:33
Expense. It cost money to earn money. And it was very good coffee, apparently.
4:40
Next time: debits and credits. The two words that have confused more people than anything else in accounting. We'll sort that out. Probably.