A chart of accounts is a set of accounts used to make up the your businesses financial statements. Having a proper setup of chart of accounts is instrumental to having financial statements that you can use as a tool to manage your business.
One of the most common setups in the corporate world is what is called a Multi-Step Format. The Multi-Step Format for an income statement looks like the setup below. You start by organizing your sales by sales categories and sub categories. Then you have your Cost of Goods (COGS) or Cost of Sales (COS). These are the expenses directly associated with the production of your sales categories. Subtract the two and that gives you your Gross Income.
Next you have your SG&A expenses or your operating expenses. These are all the expenses that your business incurs that are necessary to running the business as opposed to COGS that are direct costs associated with creating a product or service. Operating expenses can be broken out by department. Even if you do not have separate departments in your business you can still break out the costs of those “departments” As in the illustration below, under expenses, I have the Operating expenses as a category, Payroll as a category, Marketing as category, and Other Income / Expenses as a category.
Subtract your Gross Profit or Gross Income from your Operating expenses and you get your Net Income (Pre-Tax) below that you can calculate your tax liability to get your net income after tax. And below that you can have a calculation of your EBITDA. This stands for Earnings Before Interest Tax Depreciation and Amortization. EBITDA is a number that analyst’s use to gauge the performance of a company. It takes net income and ignores non-cash items (Depreciation & Amortization) and items that are not produced by the business (Interest & Tax).
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