Starting a business can be thrilling, but it also comes with a learning curve—especially when it comes to accounting. You’ve registered with the Bureau of Internal Revenue (BIR), and obtained your Authority to Print (ATP), and now it’s time to lay down a solid financial foundation for your business. One of the most crucial steps is setting up your ledger and chart of accounts. If you’ve been wondering how to do this correctly, you’re in the right place!
This guide will walk you through setting up your first business ledger and chart of accounts, whether you’re doing it manually or using a spreadsheet. We’ll also cover how to record your bank or cash balance against your capital equity, account for any pre-operating transactions, and set up the beginning balances if your business has already been running.
Let’s get started!
What is a Chart of Accounts and Why Does It Matter?
A chart of accounts is the backbone of your accounting system. It’s simply a list of all the accounts you’ll be using to organize and track every financial transaction within your business. Think of it as the blueprint that helps you categorize and understand all your income, expenses, assets, liabilities, and equity.
Your chart of accounts is broken down into five main categories:
1. Assets – Things your business owns, such as cash, bank accounts, inventory, and equipment.
2. Liabilities – Things your business owes, like loans, accounts payable, and taxes.
3. Equity – The owner’s capital and retained earnings (also known as owner’s equity).
4. Income/Revenue – Money earned from sales, services, and other business activities.
5. Expenses – Costs incurred to operate the business, such as rent, utilities, and payroll.
Each of these main categories will have sub-accounts. For example, under “Assets,” you might have separate accounts for “Cash,” “Accounts Receivable,” “Inventory,” and “Equipment.” The same goes for each other category.
This structure is essential to make sure your accounting is organized and makes sense as your business grows. And whether you’re using a notebook or an Excel spreadsheet, keeping things simple is key to staying organized.
Setting Up Your First Ledger Entry: Bank Account or Cash Balance Against Equity
Now that you understand the purpose of a chart of accounts, let’s dive into your first ledger entry. This typically starts with setting up your beginning balance, which is the initial money you’ve put into your business.
Let’s say you deposit P100,000 into your new business bank account. This is your starting capital. You need to record this transaction to reflect the money you own and the ownership in your business. Here’s how to do it:
1. Debit your Bank Account (or Cash) – This is your asset account going up because you’re adding money.
2. Credit your Equity or Capital Stock account – This is the owner’s interest in the business.
Here is an example of how to record this in a ledger:
In this example:
– Date: The date of the transaction.
– Ref No.: A transaction reference number for tracking.
– Description: A brief note on the nature of the transaction.
– Source Doc: The supporting document (e.g., bank deposit slip, with a unique number).
– Debit (₱): The increase in your asset (bank account).
– Credit (₱): The corresponding increase in your equity.
The debit and credit amounts always need to be balanced, as this is the foundation of double-entry accounting. By keeping a clear and accurate record, you’re setting the stage for financial success.
Recording Pre-Operating Transactions in Your Ledger
What if you’ve already made some purchases or paid for certain services before officially opening for business? These are known as pre-operating transactions. Common examples include buying equipment, paying for licenses, or renting office space.
You’ll need to record these expenses to make sure your financials are complete. Let’s say you spent P20,000 on a laptop for your business and P5,000 on licensing fees. Here’s how you’d record these transactions:
In this example:
– The debits are for the equipment and licensing fees, which are assets and prepayments.
– The credit reduces your cash or bank balance, reflecting the money spent.
It’s important to categorize your pre-operating expenses correctly to understand what you’ve invested into the business before generating revenue. These costs often play a role in getting your business off the ground, and they should be accounted for properly.
Setting Up Beginning Balances for an Already Operating Business
What if your business has already been operating, and now you’re just getting started with your ledger and chart of accounts? That’s okay! You can easily catch up by setting up your beginning balances as of a certain date.
Here’s how to do it:
1. List all your current assets – This includes your bank balances, inventory, equipment, and any money owed to you (accounts receivable).
2. Identify your liabilities – These are the amounts your business owes, such as loans, accounts payable, and any outstanding bills.
3. Calculate your equity – The capital you or any other owners have invested into the business.
4. Summarize income and expenses – If you’re setting up your ledger mid-year or mid-month, include all the revenue you’ve earned and expenses you’ve incurred so far.
For example, let’s say it’s December 1st, and your current balances are as follows:
– Cash in Bank: P150,000
– Accounts Receivable: P50,000
– Inventory: P30,000
– Equipment: P100,000
– Loan Payable: P40,000
This entry captures a clear snapshot of your business’s financial status. Your assets are listed on the debit side, while your liabilities and equity are on the credit side, ensuring your ledger balances properly.
Final Thoughts
Setting up your ledger and chart of accounts might seem like a daunting task, but it’s a crucial step in managing and growing your business. By keeping your financial records clear and accurate, you’ll have the insights you need to make smart business decisions and track your progress.
Remember, accounting is all about telling the story of your business in numbers. Every transaction has a purpose and every entry you make is a step toward a more successful, better-organized business. If you need help, don’t hesitate to reach out for support or download a free chart of accounts template to get started!
If you need expert guidance on setting up your business ledger and chart of accounts, kindly visit dennismhilario.com and book a free call.