Watch a 7-minute tutorial about financial management
How do you know if your business is making money, or if your business is growing? And how do you find out? Financial management makes it easier than you think. Financial management, in which the chart of accounts plays a key role, can help you:
Know where your money is coming from and where it's going.
See which customers or products are most profitable.
Have accurate and complete records to help you prepare for tax time.
By organizing all of your business transactions into two main components—Cash Flow (Profit and Loss) and Balance Sheets—and reporting on these
two components, you can see a complete view of your business finances.
One of the key components of managing the growth of your business is seeing your cash flow. Your cash flow is the cycle of money coming into your business from sales, and the money going out of your business to cover expenses. To see your cash flow you can use
the Profit and Loss report—also known as an income statement—
to summarize your business' performance over a specific period of time, such as a month, a quarter, or a year. All sales are
recorded as income and all expenses are listed by account and totaled together. By subtracting the total expenses
from the total income, this report shows you the net profit.
While cash flow shows you where you get and how you spend your money, your balance sheet shows you what your business has—what you own, what you owe, and what your business is worth.
Your balance sheet transactions include the money you invest in your business and any loans you take from the bank. These transactions are broken into three categories:
Assets: everything your business owns
Liabilities: what your business owes
Equity: what your business is worth to you
Your business' assets are equal to your liabilities plus your equity. This relationship is shown in the Balance Sheet report.
The Profit and Loss Statement and the Balance Sheet together gives you the overall picture of your business finances. The chart of accounts is the framework used to categorize the information and transactions used to create these reports.
The chart of accounts is made up of five accounts common to all businesses—the income and expense accounts used by the Profit and Loss Statement, and the asset, liability, and equity accounts used by the Balance Sheet. Each time you enter a transaction, QuickBooks will prompt you to categorize it into one of these five types of accounts.