An FM’s Intro to Accounting
Do Facility Managers need to be CPAs? Heck no. However, I will argue to my grave that we need to have a basic understanding of both managerial and financial accounting. This will not only give you a better understanding of your organization and how it functions; but, it will enable you to build a financial strategy for your department. Then, you can communicate that strategy to senior management. An FM’s Intro to Accounting gives you an introduction to accounting, beginning with the Chart of Accounts.
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Every organization must have a way to keep track of all of the information that goes into financial statements. This is typically done with accounting software. This software ranges from fairly simple to incredibly complex to use, depending on the needs of the organization. That said, the basics remain the same.
Chart of Accounts
The chart of accounts is a numerical listing of all the accounts in the organization’s general ledger. An account is where accounting transactions will be summarized and recorded. It is how all pieces of information are organized and aggregated into the financial statements by the accounting software. These are the five basic account types and are typically listed in this order of appearance on financial statements:
- Assets – are what the organization owns. An asset has lasting value to the organization and can be tangible or intangible. Examples of assets would be cash, buildings, and machinery. Typical assets include:
- Accounts Receivable (money owed to the organization)
- Prepaid Expenses (future expenses paid in advance)
- Fixed Assets (long term assets – property, plant, and equipment (PP&E))
- Accumulated Depreciation (how much the organization has depreciated an asset – purchase price minus accumulated depreciation equals the book value of an asset)
- Liabilities – are what the organization owes. There are current (come due in one-year or less) and long-term liabilities (don’t come due within the year). Examples of liabilities include loans, taxes, and wages owed. Typical liabilities include:
- Accounts Payable (money the organization owes)
- Accrued Liabilities (expenses incurred but not yet paid)
- Notes Payable
- Wages Payable
- Taxes Payable
- Stockholder’s Equity – sometimes referred to as owner’s equity, net assets or net equity, is the difference between the assets and liabilities, since liabilities lay a claim to the organization’s assets. An example is a worker who has put in 40 hours, and is due the wage for time worked. This liability will come from the company’s cash assets and lays a claim to the amount of money the worker is owed. The equation is:
Assets – Liabilities = Owner’s Equity
Typical Stockholder’s Equity includes:
- Common Stock (a security that represents ownership in a company – the number of shares of stock multiplied by their value equals the capital of the company)
- Retained Earnings (earnings not paid as dividends – could be used to reinvest in the company or for debt service)
- Revenue – is the sale of services, goods, and products. Also included are earnings from interest, dividends, etc. This is the organization’s income during this period.
- Expenses – are the organization’s outflow or money spent. There can be many expenses, but typical expenses include:
- Cost of Goods Sold (COGS) – direct costs of producing goods sold by a company during this period
- Depreciation Expense – the portion of a fixed asset that has been consumed during this period, according to accounting
You might apply the chart of accounts in your organization to various things (such as invoices, or income sources) before you turn them into accounting for input into the accounting software. Let’s say we work for a company that uses a four-digit chart of accounts. Here is a simple example of a chart of accounts showing the relationship between the number and the account:
You can see in this example that the four-digit numbers denote the type of account and ensure subaccounts fall in the correct place. In this example, the first two digits classify the major account type and the last two digits specify the subaccount. If I received an invoice for a repair on a building asset from a subcontractor, I would code it to 7030, Repair and Replacement. There are many methods on putting together a chart of accounts, but this example illustrates the principle of keeping different accounting items consolidated and separate from other types. Determine which method your organization uses and become comfortable with it.
This intro to accounting is the first in a series of articles that will give facility management professionals an understanding of the basics of accounting within business finance. The Chart of Accounts is an important starting point for understanding the small pieces of financial data that will aggregate into the bigger financial picture. In the next accounting article, we will look at Journals & Ledgers to see how these pieces fit in. If you have any questions, please feel free to leave comments below or you can reach me at anytime at email@example.com. Thanks so much for reading!