A chart of accounts is a group of accounts (or categories) used to classify or define a business’s financial transactions as revenue expenses, assets and liabilities.
In ZipBooks, we refer to the chart of accounts as Categories. When you set up a ZipBooks account, you’ll find that there are up to 73 accounts (or categories) already set up for you. These are common categories that many businesses will use right from the start. These include things like Sales, Accounts Receivable, Cost of Goods Sold, and Office Expense.
When you add a transaction to your account, you’ll assign it to an account, but as you probably know, a transaction affects more than just one account.
Here’s an example:
You have a clothing store called Nu Threads and you’ve just purchased a cash register with your debit card for $1,500. If you manually enter the transaction into your account, you'll choose a category to apply the purchase to, and an account that you used to pay for it. So, in the case of the cash register, you would apply it to the Equipment account (which is a Fixed Asset account), and you would choose the bank account that corresponds to the debit card you used.
This means that the balance of your Equipment account will increase by $1,500 (meaning your assets, or instruments of value in your business, have increased by $1,500), and the balance of your bank account will decrease by $1,500.
When you connect a bank account to your ZipBooks account, your transactions will automatically be pulled into your account and categorized. When you reconcile your bank accounts, you will double check to make sure they’ve been categorized correctly. It they haven’t, simply change them to the correct categories.
ZipBooks also lets you set up custom accounts that are specific to your business.
For instance, maybe you sell clothing, jewelry, and shoes at Nu Threads, and you want to differentiate among sales of those three items. So, you set up accounts (or categories) called Clothing Revenue, Jewelry Revenue, and Shoe Revenue. Now you know how much of your revenue comes from each type of product!
For a full glossary of bookkeeping terms, check out our blog.