Recently, I had a client, with a rental apartment/house business who had their tax accountant advise them to use a tax form, Schedule E, as a foundation for their Chart of Accounts.

 
The advice the tax accountant gave my cash-basis, sole proprietor client perfectly illustrates a chapter I address in my book regarding different audiences for your financials 1) tax, 2) management, and 3) investors.  For a tax accountant to suggest that a client structure their Chart of Accounts to strictly match the tax audience, in my opinion, is bad advice as it puts the tax preparer’s needs above the needs of the business owner to use his financials to make good business decisions (and the advice was completely unnecessary because QuickBooks has a tax mapping feature).  I have worked with many, many CPA’s over the years and never has one (until now) suggested using a tax form as a foundation for a company’s Chart of Accounts.
 

Also, my clients like to have a Cost of Revenue section for their rental business. In this case, Cost of Revenue is simply the direct costs of keeping those units (assets) in the condition to rent (e.g., utilities, property taxes, property insurance, and maintenance/repair to the building paid toward each property).  They then have a separate section for General and Administrative expenses (e.g., legal, accounting, sales, office expenses/supplies, et cetera). Even lawyers, doctors, and bookkeepers can have a Cost of Revenue section on their income statements because there are expenses directly associated with providing those services.  If applying for credit or if the financials need to be used for yet another audience – an investor or creditor – the accountant may wish to throw the Cost of Revenue into an “Operating or Maintenance” expense account to match the more traditional presentation of financial information for this type of industry.

 

It is perfectly fine for a business owner to structure his Chart of Accounts to his liking for management reporting … which is much different than tax reporting.  In the rental business, what is a sale? One could argue that a sale is the initial lease contract, which spells out what the lessor’s responsibilities are and the lessee.  In our case here, the lessor is responsible for utilities, maintenance repair, property insurance, property taxes … and so it is not a stretch to say this is a Cost of Sale.  Furthermore, by having a Cost of Revenue, the lessor can determine his true gross profit on these units and the costs are not mixed into the G&A section (especially if you use a simple accounting software such as Quickbooks).

 

If you use Quickbooks accounting software, there is a tax mapping feature where you can then map each account in the Chart of Accounts to the appropriate line on your tax form.

 

The larger point here is that management and the business owners’ reporting needs are to be considered first and foremost when structuring your Chart of Accounts, not the tax preparers.  That is not to say we don’t take a smart approach in making sure we are tracking the different areas the tax preparer will need, but building a Chart of Accounts solely to imitate a tax form does not put the business owner’s reporting needs first.

 

Remember, not all tax accountants are good at financial reporting.  They are two very different areas in accounting.

 

If you read my book, even the first few chapters, you will begin to understand some very basic things – not only about accounting – but about how to better watch out for your money.  It was written for small business owners in mind.

 
Click Here To Buy My Book, Business Bookkeeping Guide to Accounting On Amazon! And have a Profitable and Productive day!

Disclaimer: Unfortunately, it is impossible to give comprehensive financial, accounting, or bookkeeping advice through the internet. Before relying on any information given in this book, contact an accounting professional to discuss your particular situation.