Keys to Success in the Office

Every business has a different way of operating, which will be reflected in your chart of accounts.  There are four types of accounts that make up your balance sheet and income statement — assets, liabilities and equity, income, expenses.  

Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified. Account numbers are often five or more digits in length, with each digit representing a division of the company, the department, the type of account, etc.

As you will see, the first digit might signify if the account is an asset, liability, etc. For example, if the first digit is a "1" it is an asset. If the first digit is a "4" or “5” it is an operating expense or COGS.

A gap between account numbers allows for adding accounts in the future. The following is an example listing of a sample chart of accounts.

• Sample Chart of Accounts 2020

Your chart of accounts numbering usually start with assets at the top, followed by liabilities and equity, then income, and finally expenses.  We will discuss the breakdown of the four categories below.

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Assets

Assets are broken down typically into two sub-categories—current assets and long-term assets.  

The higher up on the list, the more liquid the asset may be. For current assets, it’s recommended to put cash on hand (Checking Accounts, Petty Cash, Undeposited Funds) before Accounts Receivable and Inventory, followed by any short-term Prepaid Assets that are expensed within a 12-month period.  

For long-term assets, these typically are your investments—land, building, equipment, vehicles—and then followed by the accumulated depreciation of each account over time.  

Liabilities and equity

Liabilities are usually broken down into two categories (current and long-term liabilities) with equity being a third.  All usually have the same first digit and round out the balance sheet.  

Current liabilities contain those things in your business that will need to be paid off the quickest first (Accounts Payable, Notes Payable, as well as any Accruals) followed by those long-term payables (mortgage, bonds).  Your equity accounts include any stocks (treasury, common stocks) as well as the company’s retained earnings.

One thing to note: There are a few current liability accounts that you may want to have in your chart of accounts that tailor to the Home Services Business.

• Deferred revenue liability

• Warranty reserve liability

• Any accruals—payroll, employee loan/tool accounts

• Any clearing accounts—refunds/referrals

Income

A basic practice for a company that deals in one specific trade is to have one income account called Job Income or Revenue. Most trade companies are contracted for more than one service, and it can be tedious to add to different income accounts. 

Some other income accounts that are closely tied to the trades are:

• Maintenance agreement revenue

• Warranty revenue

Above illustrates the ‘gross’ income that comes from the services you provide.  Additionally, you must track the discounts being given away from the gross sale.   

Most smaller companies tend to edit price or roll up discounts into their Job Income or Revenue GL account for easier reporting. However, it’s a best practice to split out any allowances given on an Income Statement to give management full transparency on how much has been given back.   

Some typical allowance GL accounts that deduct from income are:

• Discounts

• Refunds

• Write-Off for unpaid revenue

• Financing Fees/Buy-downs

• Customer Damages

Many companies take some of the above and move it to either a direct expense or even an overhead expense.  Companies who hold technicians and front-line management accountable for performance break out these situations and leave them at the top-line which affects the Gross Profit Margin.

Expenses

There are two types of expenses—Cost of Goods Sold (COGS), or Direct Expense, and Overhead Expense, or Indirect Expense. Typically, COGS is directly related to the job whereas an Overhead expense is the expense of doing business that’s not related to the service at the time.

Cost of Goods Sold accounts are very important to trades. It drives the margin and pricing of a company’s service.  Some common accounts to the Home Services are:

• Equipment Rental

• Materials Purchased

• Equipment Purchased

• Direct Labor

• Workers Compensation, Health Insurance, 

Depending on how you run your business, some trade assets include all labor based on sales and those who turn over jobs, or Selling Techs/Comfort Advisors.  However, others may show that as an overhead expense directly below the Profit Margin.  Keep in mind that either way, it’s important to measure and benchmark what your Profit Margin Percentage should be month-over-month compared to budget and prior years.

When putting together a list of expense accounts, it is best to consider the needs of each specific industry. A HVAC contractor may choose to have accounts for renting a crane and/or hiring a subcontractor to help with a drywall repair. On the other hand, a plumber may have expense accounts for a concrete company and/or the rental of heavy equipment.