Phase 1 – Week 2
Chart of Accounts & Transaction Coding
Learning Objectives
By the end of this lesson, the Junior Bookkeeper will be able to:
- Explain the purpose of the Chart of Accounts.
- Identify the five major account types.
- Select the most appropriate account for common business transactions.
- Differentiate between capital assets and operating expenses.
- Recognize common coding errors.
- Identify shareholder transactions.
- Understand the importance of supporting documentation.
- Explain the difference between coding based on assumptions versus evidence.
Why This Matters
Every financial report a client receives depends on how transactions are coded.
Incorrect coding can:
- Overstate or understate profit.
- Produce inaccurate GST returns.
- Misrepresent business performance.
- Create additional year-end work.
- Increase accounting fees.
- Lead to poor business decisions.
Our goal is not simply to “make QuickBooks balance.” Our goal is to produce financial statements that accurately reflect the client’s business and provide meaningful information for decision-making.
The Purpose of the Chart of Accounts
The Chart of Accounts is the organizational framework of a company’s financial records.
Every transaction entered into QuickBooks affects one or more accounts within the Chart of Accounts. Each account groups similar financial activity together so that financial statements remain organized, consistent, and meaningful.
Think of the Chart of Accounts as a filing cabinet for financial information. If transactions are filed in the wrong location, the financial reports become inaccurate and can mislead both the client and anyone relying on those reports.
The Five Account Types
1. Assets
Assets are resources owned by the business that provide current or future value.
Common examples include:
- Bank accounts
- Accounts Receivable
- Vehicles
- Equipment
- Computers
- Inventory
- Prepaid expenses
When reviewing a transaction, ask yourself:
Does the business own something of value because of this transaction?
2. Liabilities
Liabilities represent money the business owes to another party.
Examples include:
- Accounts Payable
- Credit Cards
- GST Payable
- Payroll Liabilities
- Bank Loans
- Mortgages
When reviewing a transaction, ask:
Has the business created or increased an obligation to pay someone else?
3. Equity
Equity represents the owner’s interest in the business.
Examples include:
- Share Capital
- Owner Contributions
- Retained Earnings
- Shareholder Loan Accounts
When reviewing a transaction, ask:
Does this transaction relate to the owner’s investment or withdrawals rather than normal business operations?
4. Revenue
Revenue represents income earned through normal business operations.
Examples include:
- Sales Revenue
- Service Revenue
- Consulting Income
- Interest Income
Ask yourself:
Did the business earn money from providing goods or services?
5. Expenses
Expenses are costs incurred while operating the business and generating revenue.
Examples include:
- Rent
- Fuel
- Office Supplies
- Advertising
- Insurance
- Telephone & Internet
- Professional Fees
Ask yourself:
Was money spent in order to operate or grow the business?
Eagleeye Transaction Coding Process
Before selecting an account, work through the following questions.
Step 1 – Understand What Happened
Never begin by searching for an account.
Instead, understand the transaction itself.
Ask:
- What occurred?
- Who was involved?
- Why was the purchase made?
Understanding the transaction should always come before selecting an account.
Step 2 – Review Supporting Documentation
Supporting documentation should provide enough information to identify:
- What was purchased
- Who the supplier was
- Date of purchase
- Amount paid
- Applicable taxes
- Business purpose
Never rely solely on bank feed descriptions.
If the documentation does not clearly explain the transaction, additional clarification may be required.
Step 3 – Determine the Business Purpose
The same supplier may sell many different products or services.
For example:
A purchase from Staples could be:
- Office Supplies
- Office Furniture
- Computer Equipment
- Printer Ink
- Cleaning Supplies
The supplier does not determine the account.
The purpose of the purchase determines the account.
Step 4 – Consider Whether It Is an Asset or Expense
Some purchases provide value for many years, while others are consumed during normal operations.
Generally speaking:
Examples of Expenses:
- Pens
- Paper
- Cleaning supplies
- Fuel
Examples of Assets:
- Computers
- Office furniture
- Machinery
- Business equipment
When unsure, consider whether the purchase provides long-term value to the business.
Step 5 – Consider Tax Treatment
Before finalizing the transaction, determine:
- Does GST apply?
- Does PST apply?
- Is the transaction Out of Scope?
- Is sufficient documentation available to support any tax credits being claimed?
Correct tax treatment is just as important as selecting the correct account.
Common Coding Errors
Coding Based on the Vendor
One of the most common mistakes is assuming a transaction should always use the same account simply because it came from a particular supplier.
Example:
Staples does not always mean “Office Supplies.”
Always determine what was actually purchased.
Coding Based on Bank Feed Descriptions
Bank descriptions are often vague or abbreviated.
Examples include:
- POS PURCHASE
- VISA PAYMENT
- ONLINE TRANSFER
These descriptions rarely provide enough information to code accurately.
Supporting documentation should always be the primary source of information.
Guessing
Never guess an account simply to move work forward.
Instead:
- Review supporting documentation.
- Review similar historical transactions.
- Review previous bookkeeping periods.
- Review client notes.
- Conduct reasonable research.
If uncertainty still exists after reasonable research, escalate the issue.
Treating Every Large Purchase as an Asset
A higher dollar amount does not automatically mean a purchase should be capitalized.
Instead, determine whether the purchase provides long-term value to the business.
Shareholder Transactions
Shareholder transactions are frequently miscoded because they often resemble ordinary expenses or deposits.
Examples include:
- Owner pays a business expense personally.
- Business reimburses the owner.
- Owner contributes personal funds.
- Owner withdraws money from the business.
These transactions often affect:
- Shareholder Loan
- Due to Shareholder
- Due from Shareholder
- Equity Accounts
Always determine:
- Who actually paid?
- Who benefited?
- Was this a business expense or an owner transaction?
Supporting Documentation Standards
Supporting documentation should answer the following questions:
- What was purchased?
- Who sold it?
- When was it purchased?
- How much was paid?
- What taxes were charged?
- What was the business purpose?
If those questions cannot be answered using the available documentation, additional information should be requested before finalizing the transaction.
Follow Eagleeye’s Document Request SOP whenever clarification is required.
Eagleeye Research Standard
At Eagleeye, we encourage independent thinking and problem-solving.
Before asking for assistance:
- Review the supporting documentation.
- Review previous transactions for the same client.
- Review similar transactions.
- Review client notes.
- Research applicable CRA guidance if tax treatment is involved.
- Develop your own conclusion and be prepared to explain your reasoning.
The goal is not simply to find the correct answer—it is to develop the reasoning process that leads to the correct answer.
Competency Checklist
Upon completion of this lesson, the Junior Bookkeeper should be able to demonstrate the following competencies:
□ Understands the purpose of the Chart of Accounts
□ Correctly identifies the five major account types
□ Selects appropriate accounts based on the substance of the transaction
□ Distinguishes between assets and expenses
□ Recognizes common coding errors
□ Identifies common shareholder transactions
□ Reviews supporting documentation before coding transactions
□ Understands the importance of accurate GST/PST treatment
□ Demonstrates independent research before requesting assistance
□ Can clearly explain the reasoning behind coding decisions