Ins & Outs of your Accounts!
The terms ‘Chart of Accounts’, ‘Balance Sheet’ and ‘Profit and Loss’ are all tied together.
Your chart of accounts, together with the data you enter into those accounts; makes up the basis of the information you see when you run a Balance Sheet report and/or your Profit and Loss report.
A lot of people refer to the chart of account as ‘allocation’ i.e. where do I allocate payment of the invoice to or where do I allocate my telephone expense to etc.
Your balance sheet contains your –
Assets - such as bank accounts, motor vehicles, computer and office equipment and depreciation of those assets
Liabilities - such as loans, unpaid wages and super, unpaid GST
Equity that is within the business – this is the balance that is left over once you deduct your liabilities from your assets.
The accounts that make up your balance sheet fluctuate in their balance – i.e. the balance of each ‘account’ can go up and down – as you buy and sell things or as your pay off debts etc.
Your Profit & Loss shows your income and expenses – this is self-explanatory but to dive a little deeper -
Your income makes up your gross profit
Your expenses can fall into two categories –
costs of goods sold – so this is the cost of the product or services you make your income from
operation expenses – these are expenses that you need to pay to run your business but are not directly related to the sale of your product or service
You take your expenses away from your income and this gives you your net profit or ‘take-home profit’.
However, the accounts that make up your Profit & Loss function differently to those on your Balance Sheet – instead of the balance fluctuating, these accounts make up a running balance of each income and expense – meaning they continue to grow as you allocate transactions to them. This enables you to run a Profit & Loss on any given period and extract the information just for that period, or run a Profit & Loss from start to finish to give you the total of all income and expenses.