A chart of accounts uses a numbering system to organize the data. All the data on all the reports you print comes out in numerical order. The first digit of each shows what sort of account it is, and the digits that follow put the accounts in order. As your system develops and you want to get more intricate, you can further refine this system - but the basic outline is as follows:

Balance Sheet Accounts: 1000 Asset Accounts. What you own.

2000 Liability Accounts. What you owe.

3000 Equity Accounts. The residual value of your business

Income Statement Accounts: 4000 Income Accounts. Sales. Everyone's favorite account.

5000 Direct Expense Accounts. Cost of Sales. Expenses that will quit if you're not working.

7000 Indirect Expense Accounts. General Overhead Expenses that just keep going, whether you're working or not.

8000 Non-Operating Accounts. Numbers whose meanings are pretty obvious (interest income, income tax, etc.), but which are kept at the bottom of the page separate from normal operating expenses or incomes.

Within this outline, you have a variety of subheadings that further organize your data, as follows:

1000. Asset Accounts, what you owe, come in two forms. Current assets are cash or things you can convert to cash readily, like inventory that could be sold, accounts receivable which you've billed for and should be in the mail, etc. All of that gets an early number and gets put at the top of the page on your balance sheet under Current Assets. You need to make sure that you have enough current assets on hand to cover current bills.

Fixed Assets are the ones that are bolted to the shop or office floor...the big tools, the computers, the vehicles, land, the shop itself, etc. Here is where you put the value of those items, generally expressed as the purchase price. Sorry, you don't get to put in new values as your classic vehicles become more and more valuable, or your land doubles in assessed value, or your tools take on the value of antiquity. No choices here; it's in the book. But then again, give yourself a break and put in the entire purchase price, not just what you've paid to date. You'll have a chance later on to admit how much you still owe on all those great tools.

2000. Liability Accounts. These, like assets, come in two types - current and long term. There's a pretty easy definition of which goes where - if it's due within the year, put it in the current category. If you have a loan you get to pay out over time, you can put it under long term, with the one small caveat that you have to take one year's worth of principal on each loan and put that part under current liabilities-because you do, in fact, owe that within a year. One thing you're going to find under liabilities, and under current liabilities no less, is customer deposits. OK, you say, that's really cash in hand, a serious asset, jobs sold, lucrative profits, trips to the Caribbean, etc. That's true...after you earn it. Until the product is made or service rendered, you are holding money that belongs to someone else. Even if you have spent money from contracts which claim it's non-refundable, it still isn't earned. This is really protection for you-you have a long list of expenses to work your way through before you make that trip to the Caribbean. List this as a liability, and earn it. You will have a chance to earn it a bit at a time, reducing the liability as you go. These numbers up until now are all what you call balance sheet accounts.

 The information here will show up only on your balance sheet. They all have a serious and intimate relationship with the numbers on your income statement, but the next discussion topics will actually make your income statement.

3000. Equity. You should get your accountant's help in setting up these accounts. They'll be different depending on what sort of outfit you are - sole proprietorship, partnership, limited liability company, or corporation. Equity accounts have different ways of relating to one another, and different ways of being treated anyway-leave them to your accountant.

4000. Sales. This is where you enter the value of any sales you make.

5000. Direct Expenses (or Cost of Sales). Here is where you enter the expenses that will stop when you are not working. The costs that go directly into the product you are making, or the service you are providing...labor, materials, etc.

7000. Indirect (General) Expenses. This is the area of overhead. Those expenses which never go away. Keeping the Direct Expenses separate from Indirect Expenses is very important. You'll need to know what your overhead (indirect expense) is when you price your work. You'll want to know what your gross profit is when you start analyzing your numbers. Those sorts of things you will only know if, as you go along, you make a concerted effort to separate your direct from your indirect expenses. On the other hand, don't get too nit-picky about it. Just follow the simple rule-costs that go into making your product or expenses related to your services are considered "direct". As far as the people in your organization go, overhead is the support staff-office and sales, primarily. Shop and design is direct, the staff with billable time.

Unless you're in retail sales, then the wage for your salesperson is a direct expense.