Mistakes retail business owners make with chart of accounts
It’s the last thing you probably want to think of with your business. However, if you’re making mistakes with your chart of accounts, you could end up with many preventable problems. Here are the five top mistakes retail business owners make with their chart of accounts:
- Not updating the chart of accounts after the first day in business. You’ll have new product lines, different kinds of marketing expenses, different locations. Not updating this will make it difficult to track your expenses in a meaningful way. A good rule of thumb is to review the list of accounts in your accounting software file once a year.
- Not syncing your inventory to your accounting – imagine having to count all the numbers in your point-of-sale, then manually updating the inventory in your accounting software. You can do that… if you like living life on hard mode. There is enough hard mode for you without you making any more of it. Sync your point of sale to quickbooks online, Xero, or Shopify to update your inventory in real time as things get sold. You update one system, and everything gets updated.
- Not accounting for sales returns or discounts – Your inventory is accurate but your sales isn’t. It only takes a few of these for something to feel off. Enter Contra-revenue accounts. Let’s say you’re selling an easy chair for 400$. If the chair was sold at a 10% discount, you would Debit Cash $360, Debit Sales Discounts $40, and Credit your Sales Revenue $400.
If a customer returns the easy chair, you can Debit Sales Returns $400, Credit Sales Discounts (to undo the discount) $40, and finally Credit the Cash in your bank for $360.
Aren’t Contra-Revenue accounts useful?
- Overgeneralizing. Using one expense account for Cost of Goods Sold and only one for Sales. Remember, accounting is not just to follow the law or comply with tax regulations. It is also to report accurate information. If you sell furniture, for example, maybe you should have one Sales Account for mattresses, another for sofas, and another for furniture accessories. Then you can track and see what is bringing in customers and ultimately making the most sales. This information helps you know what to stock to increase your sales per square foot. The same can be said about expenses via Cost of Goods sold.
- Neglecting Locations or departments. This ties into tip #1 if you’re a store that’s just starting to branch out. You can use tools in Quickbooks like locations to reflect where the sales (and expenses) are coming from. Big stores with multiple departments should be using classes to track each department.
- Bonus: Overspecializing – this will just make it more difficult to read your books when it’s time to make decisions about your business. Imagine you took tip number four too far – making sales and cost of good sold accounts for every product. Try reading your P&L then! You won’t, and you’ll stop relying on documents that are too hard to read. Keep it simple.
These tips should make reporting information for your retail store WAY more accurate. To have me look at your books, schedule a call with me to discuss your bookkeeping strategy. By taking most of the bookkeeping off your hands, I can save you up to 80+ hours a year compared to doing it all yourself.