Some people refer to the Chart of Accounts as the “backbone” of your company file. All transactions flow to it. Its primary importance can be summed up in one word: reports. Your reports will not be accurate if your Chart of Accounts is poorly constructed or if you categorize transactions incorrectly. This becomes as issue when you want to:
- Prepare taxes. Your income tax return will not reflect your reportable income and deductible expenses if transactions are not assigned to the right classifications.
- Apply for financing, take on an investor, sell your company, etc.
Monitor your finances. You won’t get a true picture of your income and expenses, which makes it difficult to analyze your company’s fiscal health and plan for the future.
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