Why Your Books Need to Stay Clean
At the core of running a successful business is organized financial information. Clean, accurate books are essential, not just for knowing how your business is performing, but for a fast, stress-free tax season.
Your Collective membership includes a bookkeeping service that handles the categorization of all your business activity. This process delivers clear, organized, and tax-ready financials that you can rely on year-round.
The Chart of Accounts (COA) Explained
Your Chart of Accounts (COA) is simply a standardized list of categories used to classify every transaction from your business bank and credit card accounts. Think of it as the shared language the IRS uses to track business performance.
It serves as the foundation for the key financial reports you'll find in your Collective dashboard: the Profit and Loss Statement and the Balance Sheet.
Our Standardized Approach
Collective maintains a standardized Chart of Accounts. This structure is designed by our tax experts to ensure optimal categorization and proper tax reporting.
- No Custom Accounts: We highly discourage creating custom accounts. Why? Our standardized COA is already aligned with IRS policy, and adding custom accounts typically adds unnecessary complexity to your bookkeeping without providing any additional tax benefit when you file your return.
- Need an Exception? If you believe a custom account is warranted, please reach out to our support team for a discussion before attempting to create one.
The Journey of a Transaction Through the Categorization Process
We follow a specific flow to ensure your transactions are recorded accurately.
-
Sync: Transactions sync into your Collective account through your bank connection. An initial category is assigned instantaneously.
- Please note that at this point Collective has not processed the transaction, so this initial category may not align with previous categorization rules / policies for the specific vendor made by you or Collective. If you are reviewing a transaction that you feel should have a different category based on previous actions taken by you or Collective, check the date of the transaction. If the date is recent, it is likely that the transaction is yet to be processed by Collective during which the category would be updated.
- System Categorization: Shortly after syncing, our system processes the transaction.. It learns from your historical trends (e.g., previous transactions from the vendor) and if a category can be determined by our system, the transaction is recategorized / current category validated based on that determination..
- Team Review: If the system cannot determine the category, an accounting professional reviews and categorizes it.
- Member Review: If neither the system nor the team can determine the category, the transaction is routed to you for review.
How a Member Reviews Transactions when it is flagged for their review
When transactions are routed to you for review, you must take one of three actions:
1. Mark as Personal (Shareholder Distribution) First, assess if the transaction is truly a business expense or personal.
- If personal, mark it as such. Because it ran through a business account, it will be categorized to Shareholder Distribution.
- This ensures personal transactions do not erroneously misconstrue your true business activity.
2. Recategorize If it is a business expense but the current category is incorrect, select the correct category from the dropdown list.
- Refer to the standard Chart of Accounts to find the answer.
- If you recategorize a vendor's transaction, the system will begin to "learn" this for future transactions so you don't have to do it again.
3. Confirm/Mark Reviewed If the transaction is a business expense and is already in the right category, simply confirm it to remove it from your review list.
Helpful information related to reviewing transactions
- We highly recommend maintaining receipts to your transactions. Some transactions might get extra attention from tax authorities. Make sure your expenses are reasonable, necessary and directly connected to your business, and backed up with proper documentation. Learn more.Important: We require that all transactions requiring your review be recategorized or reviewed by you for your tax return to proceed. Regularly clearing this list prevents a bottleneck during tax season. Staying on top of this month-over-month will allow you to ease into a smooth tax season without delay.
- Please note: You always have the ability to review any transaction by going to the “All Transactions” section of your Transactions page. If you ever choose to change the category of a transaction in this list that was iinitially categorized by Collective’s system or an Accountant, you can do so. Our system and team of accountants will account for this action when categorizing future transactions from that particular vendor.
An Overview of Categories on the Profit & Loss Statement
The Profit and Loss (P&L) statement tracks regular, ongoing activity.
Income Accounts
The top of the P&L records revenue.
| Account Name | Description & Examples |
| Services Income | Money received from customers for services provided. |
| Billable Expense Income | Revenue collected for expenses billed back to clients. |
| Uncategorized Income | Income needing further clarification. |
Expense Accounts
These are cash outflows deemed ordinary and necessary to drive business operations.
| Account Name | Description & Examples |
| Advertising & Marketing | Google/FB ads, domain registration, hosting, business cards. |
| Auto Expenses (deductible) | Auto expenses that can be claimed in addition to mileage (e.g., parking, tolls). |
| Auto Expenses (non-deductible) | Gas, insurance, and repairs if you claim the standard mileage rate. |
| Bank Charges & Fees | Service fees, NSF fees, wire fees. |
| Business Insurance | General liability and business insurance (not life/health/disability). |
| Client Gifts (deductible) | Tax deduction limited to $25 per person per year. |
| Commissions Expense | Commissions paid to non-employees. |
| Contractors | Money paid to individuals for services (except W2 employees). |
| Depreciation | Allocation of the cost of tangible assets over time. |
| Amortization | Allocation of the cost of intangible assets over time. |
| Dues & Memberships | Professional organization dues. |
| Education & Training | Conferences, continuing education, business coaches. |
| Employee Reimbursement | Reimbursements to employees for business expenses. |
| Home Office | Expenses related to a home office (for accountable plans). |
| Mileage | Mileage reimbursement expenses. |
| Phone/Internet | Business portion of phone and internet expenses. |
| Employer Retirement Contributions | Company portion of Solo 401k, SEP, etc.. |
| Equipment & Furniture | Computers, laptops, desks, chairs, office décor. |
| Interest Paid | Credit card interest, loan interest. |
| Job Supplies | Supplies necessary for specific jobs or projects. |
| Legal & Professional Services | Collective fees, attorney fees, CPA fees. |
| Meals 50% | Business meals with clients, office snacks. |
| Meals 100% | Company holiday parties, food given free to the public. |
| Merchant Processing Fees | Credit card processing fees (Stripe, PayPal, etc.). |
| Mortgage Expense | Interest portion of business mortgage payments. |
| Office Expenses & Software/Subscriptions | Paper, pens, software (Adobe, Google), subscriptions. |
| Payroll - Employer Taxes | Employer portion of payroll taxes. |
| Payroll - Officer Gross Wages | W2 wages paid to officers (owners). |
| Payroll - Officer Health Insurance | Health insurance premiums for officers. |
| Payroll - Staff Benefits | Fringe benefits for staff. |
| Payroll - Staff Gross Wages | W2 wages paid to non-officer staff. |
| Payroll - Staff Health Insurance | Health insurance premiums for staff. |
| Postage & Delivery | Shipping, stamps, courier services. |
| Property Taxes | Taxes paid on business property. |
| Rent & Lease (Equipment) | Rented or leased equipment. |
| Rent & Lease (Property) | Non-home office space, storage units. |
| Repairs & Maintenance | Computer repairs, equipment maintenance. |
| State Franchise/Excise Taxes | State-specific business taxes. |
| Taxes & Licenses | LLC fees, business licenses. |
| Travel (excl. Meals) | Hotels, airfare, car rentals, taxi fees. |
| Utilities | Utilities for separate non-home office space. |
Other Income & Expenses
Transactions not directly tied to core operations.
| Account Name | Description & Examples |
| Interest Earned | Interest from business savings accounts. |
| Cash Back Rewards | Rewards on business credit cards. |
| Investment Income | Income from business investments. |
| Other Non-taxable Income | Forgiven loans (PPP) or grants. |
| Charitable Contributions | Donations made in business name. |
| Income Taxes | Federal or state income tax payments. |
| Client Gifts (non-deductible) | Gifts exceeding the $25 deductible limit. |
| Meals & Entertainment (0%) | Entertainment (golf, sports), personal meals. |
| Other Non-deductible Expenses | Expenses not eligible for tax deduction. |
| Penalties, Interest & Settlements | IRS/State penalties or late fees. |
| Prior Year Employer Retirement Contribution | Contributions for a previous tax year. |
| Non-deductible Sales Tax Paid | Sales tax that cannot be claimed. |
| Uncategorized Expenses | Expenses needing review. |
An Overview of Categories on the Balance Sheet Statement
Balance sheet categories represent assets, liabilities, and equity.
Asset Accounts
| Account Name | Description |
| Manual Import | Placeholder for manually imported transactions. |
| Accounts Receivable | Money owed to the business by customers. |
| Taxes Receivable | Overpaid taxes to be refunded. |
| Prepaid Expenses | Expenses paid in advance. |
| Payroll Advances | Advances paid to employees. |
| Prepaid Payroll | Payroll paid before the period it covers. |
| Investments | Business investment assets. |
| Automobile Cost | Purchase price of business vehicles. |
| Automobile Accumulated Depreciation | Total depreciation recorded for vehicles. |
| Computers, Servers & Related Hardware Cost | Cost of computer equipment. |
| Computers, Servers & Related Hardware Accum. Dep. | Depreciation for computer equipment. |
| Furniture & Equipment Cost | Cost of furniture and office equipment. |
| Furniture & Equipment Accum. Dep. | Depreciation for furniture/equipment. |
| Other Fixed Assets Cost | Cost of other assets. |
| Other Fixed Assets Accum. Dep. | Depreciation for other assets. |
| Amortizable Asset Cost | Cost of intangible assets. |
| Accumulated Amortization | Total amortization recorded. |
Liability Accounts
| Account Name | Description |
| Accounts Payable | Money owed by the business to vendors. |
| Taxes Payable | Taxes collected/owed but not yet paid. |
| Retirement Plan Payable | Retirement funds to be remitted. |
| Deferred Revenue | Income received before services are performed. |
| Accountable Plan Clearing | Clearing account for expense reimbursements. |
| Payroll Liabilities | Unpaid payroll obligations. |
| Payroll Clearing | Clearing account for payroll processing. |
| Payroll Payable | Net payroll owed to employees. |
| Sales Tax Payable | Sales tax collected to be remitted. |
| Customer Deposit | Deposits received from customers. |
| Loan Payable | Business loan balances. |
Equity Accounts
| Account Name | Description |
| Opening Balance Equity | Placeholder for initial account balances. |
| Capital Stock | Initial member contribution (as per Operating Agreement). |
| Additional Paid-in Capital | Additional capital invested in the business. |
| Shareholder Contribution | Personal funds transferred to the business. |
| Shareholder Distribution | Business funds transferred to personal accounts. |
| Personal Income & Expenses | Personal items running through business books. |
| Retained Earnings | Accumulated earnings from prior years. |
| Ask Member | Transactions requiring your input. |
| Under Collective Review | Transactions being reviewed by our team. |
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.