Lesson 5- Chart of Accounts
So a chart of accounts is just a list it's a fancy name and you have the nice looking one that we'll get to in a moment um it's just a fancy list of categories to put your money into your income and your expenses that's all it means um so you have bank accounts that's a type of account but then you also have income accounts and you have expense accounts and you've probably heard those terms before to um so accounts is just a fancy word for categories chart of accounts fancy way of saying list of categories um that's all it really means why would you need this chart of accounts why does it matter what box you put your money into? Why why does it matter that you put you know the fabric that used to make something in a different box than the scissors you used to cut it right doesn't all just get lumped together in like stuff I bought for my business right? It's a business expense why do I need to categorize it any smaller than that? Um on the one hand it makes your taxes a lot easier. Thi...
s is an example of an american tax form. This is the irs schedule see profit or loss from business and you can see it has categories that has an income section has an expensive section um and if you're using similar categories then at the end of the year you've already got this stuff laid out right? You already know how much you spent on advertising and promotion how much you spent on your car and truck um and you just plug those boxes in and that's fabulous and if you have an accountant they will love you if you come to them with a uh ledger that has all of this stuff already divided by account because then they don't have toe go sorting through all of your transactions and try and pick out what goes here what goes there? Um etcetera, etcetera but that's sort of a secondary benefit, right? Um the primary benefit to having your money in all of these different accounts is it lets you makes lets you make business decisions right? If you've got stuff separated out like let's say you've got, um your craft fair fees separated out from everything else and then you've got your craft show sales separate then you can compare those two things accurately did I make money off of this show or not? Um if I paid for this kind of marketing um did it actually drive sales or not? Um am I giving away too much in terms of coupons and discounts? Uh, you can't track those things unless you have them separated right uh so this is why we're doing that and a chart of accounts is, um again sort of a matter of preference I mean the one that I've drawn up here for crafters um I've put together in a way that it covers the most common expenses and income that a crafter will have um so if you are a photographer or you're another kind of creative professional you're probably gonna want to alter some of these um and then because I'm an american and we're here in the u s some of these are laid out these ones that are here in bold um are the categories that match up with that irs sheet so I always have more than what the irs collects um I like to separate things out like the irs has a category commission and feet commissions and fees um but then they're selling fees like etc fees craft fair fees that are different from merchant service fees which are the fees that you get charged by like paypal or etc or square to process credit cards um so you can lump those all in together when you do your taxes but I like to track those things separately so this's a sample chart of accounts you can add or subtract any accounts to this that makes sense for your business um you know if it makes sense for you to track um I don't know I'm trying to think of like sign painting and metal furniture what you would track out separately maybe you guys can think of some examples like what are some things that you what would like to track really closely? Um, for your business in particular? Can you guys think of anything that you'd really like to follow in terms of, like materials or outside healthy use? Or, um, the ways thatyou ship things or I don't know, maybe shipping supplies would probably be helpful to have a better idea about yeah, so that's actually a really common one for crafters, so, you know, in general, shipping fees would go just like under your office supplies. Uh, but if you want to track like, how much you're spending in comparison to everything else on, you know, the cartons and the bubble wrap for the day, you know, whatever that crumpley paper is called that you stick in there, um, that's really helpful to pull out? Um, so you any any of those expenses or income if you want to track different income streams like right here, I've got product sales, shipping and handling and consulting, but if you want to track sales from one craft line versus another craft line, by all means separate those out. You definitely want to see if one line or one area of your business is doing better than another, um so again, sample chart of accounts feel free to edit these as you see fit for your own business. You know the ledger includes thes accounts as I've written them up but the ledgers air totally editable you can add or subtract to them as you like uh so it's all about what's what makes sense for you and your bizz that as far as what you want to follow what you want to make decisions about uh let's see, here we go. Okay, so, uh let's talk a little bit about that mileage diary you asked me about. So for, um your car and truck expenses you've gotta mileage diary um it's pretty simple, but it basically tracks the, uh start and end mileage for your business trip your little business travel even if it's just you going to the store to buy materials so that you have the number of miles that you've driven um now I should mention that you only need the mileage diary really? If you use your car for both business and personal um trips if you have a vehicle that specifically for your business and you do nothing with it except use it for your business you don't need to track anything fussier than that just all of your car expenses save them. We'll enter him in the ledger in the car category done zo easy peasy uh if you use your car for both business and personal trips like many of us do um you need to keep track of which trips you took for business in which trips you took for your personal life because you can't deduct it on your taxes for example um any personal driving that you did and you also don't want to mix that up uh into your books because that effects whether your company's profitable or not um I want to keep them all separated and we're gonna talk a little more about that too but in general you want to keep all the business money separate from the personal money so that you contract the business money accurately you don't want to muddy the waters so in your mileage diary you'll have to track the number of miles that you drove um what your you know what you spend whether you bought gas whether you paid for parking um and then you'll need to record what that business purpose was. Um the nice thing about having a mileage diary in the u s is that that works as evidence uh for the irs so you don't have to save like every tiny little parking meter receipt that you've got if you've entered it into your mileage diary so that's kind of nice um this perfectly sufficient as evidence you do need to have the business purpose on there you can't just put you know parking gas whatever um were you driving teo a client meeting where you driving to a craft fair? Um did you go to a conference um well, actually that might go under travel. We'll talk more about that too. Um we'll also talk about how it doesn't really matter whether you put it in car, truck or travel. Uh, did you drive to the store to pick up materials? All that sort of thing that would go in the in the car and truck under the mileage diary? Yes. Eso at previous jobs where I've had to track miles we weren't allowed to count to and from the office that's considered part of the regular commute. So if my studio is based somewhere other than my home do I count the miles that I drive to the studio every day or not? Excellent question. No, you do not. Okay, driving from your home to your place of business is a commute and it's not part of your business expenses school. Thanks. Yeah. Good question. Um, yeah, you never track your commute if you commute to work and then you go from work to a client meeting and then you go from that client meeting back home. You on ly track the time you spent from your office to the client meeting anything going to or from your house in general, you would not put that in as miles? Yeah, good question. Would you do that? You're a freelancer of you, you, uh a contract it to work for a particular his national official period of time does that commute counters it's still not accountable if you're hired as a contractor um then you are going to that clients you know place of business that's fine with that yeah that's not it that's not a commune but if you're driving to your job or your own office or studio uh that's a commute driving to somebody else's business in order to do perform business for them that's totally fine that's a business expense yeah yeah no my pleasure. Um let's go back and take these in a little more a little more order um so we talked about income a little bit ah, you've got product sales, shipping and handling this's income um you make money off of this, you charge people for your shipping and handling and then you will have to pay uh, you know, the costs for your shipping supplies um but you should absolutely be including handling. I mean, it takes your precious time which you have now calculated at a fabulous freelance rate um to put those orders together and get him out the door um a lot of people and especially in the early days of etc it was like really taboo to charge for handling I don't know why this wass but all these people had disclaimers on there let's see pages that were like I only charge the postage cost for shipping I don't make any money off of shipping like it was this horrible thing to make money off of shipping we know what he's going to get rich off of shipping and handling this is not like a racket that you know, somebody put together I mean maybe okay those made on tv commercials where it's like we'll give you a million things for nineteen, ninety five and if you call now you'll get double the number at half the price but it's one hundred twenty dollars in shipping and handling right like other than that nobody is making money off shift in handling so put those costs in there for heaven's sake um it takes time and you should be paid for that um and I don't think that most people these days are under any illusions that like it somehow happens magically overnight by elves who like don't need to pay bills um but it's good to track that separately because it's not part of your actual products and what you make and all that stuff so put that in its own box um consulting if you do any services as opposed to selling products, I stick it in its own box again if you do multiple kinds of services if you performed design services and you also perform marketing services or um if you uh, help with branding. And you also teach bookkeeping classes like those air separate streams, and you can track them separately, can have consulting, bookkeeping, consulting, branding and see how those air going individually. Um, and then we got an other income category that just catches random little things. Like, maybe you got a rebate from the store. An instant rebate. Maybe you got cash back on your credit card. Um, other income is where you put those, just like a random little things that come in.