Concepts
Chart of accounts
A chart of accounts is the organised list of categories your business uses to record transactions, such as sales, wages, rent and GST, and it shapes your financial reports.
A chart of accounts is the list of all the accounts your business uses to classify its money. It usually groups accounts into assets, liabilities, equity, income and expenses, with each account having a name and often a code. When you enter a sale, bill or bank transaction, you choose the account it belongs to. The chart you set up determines how detailed your profit and loss report and balance sheet will be.
A good chart is tailored to the business. A cafe might have separate income accounts for food and drinks, and expense accounts for ingredients, packaging and wages. A consultant might have only a few income accounts and a short list of expenses. Too few accounts can hide important information, while too many can make coding slow and inconsistent. Many accounting packages provide a default chart that you can adapt.
The chart of accounts also supports tax compliance. Having separate accounts for items that are treated differently for tax makes it easier to prepare your return and BAS. For example, separate accounts for entertainment, motor vehicle expenses, private use, capital purchases, wages, super and interest help ensure each is handled correctly. Keeping capital items out of ordinary expense accounts is also important, since capital purchases are treated differently, including at G10 on the BAS.
GST codes are usually linked to accounts and to individual transactions. An account might default to a code such as GST on income, GST on expenses, GST-free or input taxed, but the code should be checked for each transaction, because the same type of expense can sometimes be treated differently. Wages, for instance, carry no GST, and bank fees are usually input-taxed financial supplies. Correct default settings reduce coding errors.
Changes to the chart should be made carefully. Renaming an account is generally safe, but merging or deleting accounts that hold history can distort reports. If you need to change a structure, consider making the change at the start of a financial year, or consult your bookkeeper or accountant. Keeping a consistent chart from year to year allows meaningful comparisons.
A common misunderstanding is believing that the way expenses are labelled determines their tax treatment. The account name does not decide whether something is deductible or whether you can claim a GST credit. The substance of the transaction does. Another is using a miscellaneous account for everything, which weakens your records. This is general information only, so confirm how this applies to you with the ATO or a registered tax professional.
Worked example
A mobile mechanic sets up separate expense accounts for parts, tools, vehicle running costs, insurance and phone. When she buys a $2,750 diagnostic scanner including $250 GST, she codes it to an equipment asset account, not to general expenses. The $250 credit is claimed on her BAS, and the $2,500 appears as a capital purchase, which is treated differently from ordinary expenses.
Practical tips
- Set up separate accounts for items treated differently, such as capital purchases, private use and entertainment.
- Check the GST code on every transaction, not just the default for the account.
- Make major changes to the chart at the start of a year, and ask your bookkeeper first.