Reader: Tom, I’m having my bookkeeper convert my chart of accounts (ugly), to one most recommended by you. Is there a handy article or link that would take me there and possibly lend explanations to the categories and what should be in them? … Thanks, Joel
Tom: Thanks for asking because yes I do. Fact is we have just published my 2012 Chart of Accounts Manual for Small Press and Digital Shops which is available to all for $50 at www.crouser.com/shop.
Now please understand this is a starting place as there are very few absolute answers. While there are issues within the Balance Sheet (manual covers all statements and all accounts) and other statements, most have chart of account questions relating to the Income Statement as you do, so let’s focus just on that statement. Following are some tips for you:
1) Organize information in categories for your use, not your accountant’s.
You are the person who must see what is going on. I recommend you break the Income Statement into three parts of cost: direct materials; wages paid to others; and overhead. What comprise the parts?
Direct materials is defined as, “If you printed nothing, there would be no expense.” Paper, ink, toner and more are incorporated here.
Wages paid to others is defined as “wages walking out the door.” This means wages paid to others, not you and your spouse. How come? For analysis purposes, it is important to see how much income the business is generating vs. amount owners are taking out. In fact, one of the common problems in many small businesses is a “make and take more.” Business earns $100,000 Income before Owner’s Compensation and the owners take out $200,000. What’s the problem with the business? Hum.
Finally, overhead is defined as anything that is NOT a direct material or a wage walking out the door. Advertising, depreciation, equipment leases, rent, utilities, delivery costs and more are overhead costs.
What’s left over? Income before Owner’s Compensation is left and it’s a concept used by other industries besides small press printing. This allows you to see how much the family is earning and separates, as stated above, how much the family is withdrawing.
But what about semi-variable expenses like copier rentals? Here we pay a set amount each month and then additional based on the amount of impressions. Well, here you have a compound entry. Into equipment rental (an overhead item), you would record the base rent or the amount you would pay during the month IF you made NO COPIES. The difference between that and the total bill is then a variable expense and should be recorded in copier
Once you have these three breakouts, then it is very easy to analyze the issues of the business whether it be a “make and take more,” low pricing, too much labor, too much overhead, “brokered effect” or a compound problem.
2) Logically match categories of sales and expenses
Categorize various types of sales and match them with direct material, wage and overhead accounts as much as practical. For instance, commonly printing and graphics (pre-press or design) are separate categories. From this we often see a printing direct materials account (or accounts directly related to printing such as paper, plates, inks and more) as well as a graphics (or prepress, etc.) direct materials account.
Again the reason for this is analysis as well as budgeting. Graphics sales of $20k per year along with graphics direct materials of $2k and a $40k employee tells you at a glance that you are losing at least $22k per year in providing graphics. One might consider outsourcing part of this work and/or cross training some people. Anyway, this type of analysis is available to you with a properly constructed chart of accounts.
One of my favorite improper ways to set up a chart of accounts is the accountant who chooses to record two types of sales: Taxable Sales and Non-Taxable Sales. Now compare this with the cost of paper and see if you can figure out anything useful. Nopey.
3) Organize for information; not data.
Repairs and maintenance is an account most smaller-sales-volume printers use. As the shop grows, often this will become three accounts: R/M Equipment; R/M Plant; and R/M Auto.
Now here’s where I think it gets strange, a number of printers have accounts for Repairs and Maintenance of each individual piece of equipment so they begin junking their Income Statement up with plenty of detail but no information.
IF one chooses to go to this level of detail (usually a quick analysis of the Repairs/Maintenance Equipment will reveal specifically what piece of equipment the expenses were for); then one could have the following subsidiary accounts within a general account titled Repairs and Maintenance Equipment:
Repairs/Maintenance Heidelberg MOZ
Repairs/Maintenance Small Presses
Repairs/Maintenance Bindery Equipment
When the income statement is printed, it can be printed with detail or not. For analysis purposes, income statements that are longer than two pages are suspect to being too detailed. By using subsidiary accounts, one can maintain both simplicity and detail.
4) Use clear language in titles.
Your financial statements aren’t just for you. For most of us they are also presented to our bankers who don’t necessarily understand our jargon. Don’t make them assume. Keep words simple rather than complex, especially when it comes to account titles. An account titled Heidelberg MOZ would mean nothing to most bankers where they would be able to interpret an account titled Repairs/Maintenance Heidelberg MOZ
Now, specifically to Joel’s questions:
Reader writes -> Your very thorough chart of accounts you provided us has been very helpful. So, thanks again! I was asked two small, but very similar … where would you see delivery vehicle fuel coded? The second one, which has morphed over the years, is all of the computer related expenses outside of buying a new one that is. Examples being Adobe software’s, monthly website hosting, PrintSmith annual fees for phone support, virus protections etc. …Thanks in advance! Joel >>
In my recommended Chart of Accounts, gas for the delivery truck would be placed under Delivery Expense along with any associated costs except for Repairs/Maintenance (expenses such as tolls, parking for deliveries, gas, parking tickets).
Joel goes on to write -> The second one, which has morphed over the years, is all of the computer related expenses outside of buying a new one that is. Examples being Adobe software’s, monthly website hosting, PrintSmith annual fees for phone support, virus protections etc.
Joel, I see these expenses in Office Expense OR a subsidiary account within the general category of Office Expense such as an account for computer related expenses. Computers are basically the same as adding machines and comptometers (computers), service for adding machines (like PrintSmith support), pencils, ink and erasers (software), etc.
Again, one could break up subsidiary accounts within Office Expense for a whole bunch of categories IF they are material (and if they amount to less than 1% of sales, they are not material on the face of it unless for a specific reason – such as a tax account you need to double check the tax filings).
However … be careful not to be too detailed in your accounts for the purpose of the income statement is to SUMMARIZE data NOT to serve as a micromanaging tool.
Hope this helps ….