When operating your dispensary, there are critical processes you need to keep track of to avoid tax compliance fines and maintain business operations.
A dispensary chart of accounts is a way you can organize your financial records, keep track, and minimize or avoid the risks of accruing fees.
The dispensary chart of accounts allows you to categorize accounts that your business uses and records financial transactions coming in and out of your business.
To incorporate the method, follow a clear procedure to enhance your financial processes.
We’ll explore more about the dispensary chart of accounts, what it is, and how to build a strong dispensary chart of accounts for your business.
What Is A Chart Of Accounts?
As we mentioned earlier, a chart of accounts is a series of financial categories your business already conducts daily. The COA organizes your financial transactions into categories to get a picture of your financial records.
It is the foundation of a business or dispensary’s financial accounting system, providing a framework for categorizing and organizing financial data.
The dispensary chart of accounts improves operations for any cannabis business, regardless of the operation type.
Why You Need A Chart Of Accounts
When you organize your financial categories into a COA, you minimize the risks of getting fined by tax authorities since you can keep track of all financial movements in the business.
It makes your business run smoother without worrying about what financial asset goes where and how to record different categories like expenses.
You can track, record, and categorize all financial transactions that require you to meet tax-compliant protocols.
If you don’t have a COA, it can make tracking all your financial records challenging and leave you open to tax issues like the 280e tax code. Aside from conducting the 280e loophole, a dispensary chart of accounts follows the code to ensure smooth operations.
How To Build A Dispensary Chart Of Accounts
When operating your dispensary, a COA is essential for your financial processes, especially if you are looking for cannabis financing. We have a clear roadmap for you to build a dispensary chart of accounts that improves your finances.
Basic Key Components And Structure Of A Dispensary Chart Of Accounts
The key components and structure of a dispensary chart of accounts allow you to identify what you need.
Here’s a snapshot of the key components to establish the foundation for building a COA:
- Account Numbers: To stay in an organizational system, you need account numbers that assign your accounts to a unique numerical code identifier. This helps sort and group accounts in your business.
- Account Titles: These accounts should also have account titles to describe the account for easier organization, like sales revenue and rent expenses.
- Account Types: Accounts have different classifications or types that describe the purpose of the account. These accounts are assets, liabilities, equity, revenue, and expenses. Your business may have different types since all businesses operate differently.
- Hierarchy: Every COA has an organizational hierarchy of categories, subcategories, and other areas. This system is set in place to organize and present financial information.
- Balance Sheet And Income Statement Accounts: These are in the chart of accounts and have categories like assets, liabilities, equity, and income statement accounts relating to revenue and expenses. This distinction helps in preparing financial statements and analyzing the financial position and performance of the organization.
- Control Accounts: These are summary-level accounts, representing the total balance of related subsidiary accounts. It’s basically a summary of all your financial data that can help reconcile subsidiary records.
These are the basic foundations of what a dispensary chart of account consists of to organize all your financial records.
When you get the foundations down, you can establish common account categories and subcategories for your dispensary.
Common Account Categories And Subcategories For Dispensaries
These account categories and subcategories include the following:
- Revenue Accounts: These consist of product sales from edibles, concentrates to prerolls, and others.
- Cost of Goods Sold: Anything related to inventory costs including packaging materials and accessories.
- Operating Expenses: These are facility expenses, personnel expenses, marketing, compliance costs, security, and inventory management.
- Taxes: This category would revolve around cannabis excise tax, sales tax, and income tax. Writing this category can help you uncover the 280e loophole to counteract the IRS Tax Code.
- Assets and Liabilities: The elements in this category are current assets, fixed assets, current liabilities, and long-term liabilities.
- Equity: Last but not least, equity consists of owner’s equity, like capital contributions and others.
The categories aren’t going to be the same for all dispensaries since many have different financial transactions. You may have different categories that represent the financial status of your business.
Considerations And Planning
You need to consider your financial status and map it out accordingly. By knowing the business’s current financial standing, you can take control of it and develop a plan.
Getting clear about your finances isn’t something you should leave up to chance. You need to start planning out your chart of accounts and identify the key categories.
Optimizing Your Chart of Accounts For Efficiency And Compliance
After you write up your chart of accounts, you can then optimize it for efficiency and compliance.
These efficiency methods include organizing accounts hierarchically, ensuring consistency, and incorporating regulatory compliance requirements. We’ll dive into these methods now to ensure you optimize your finances further.
Best Practices For Organizing Accounts Hierarchically
One of the best things for your chart of accounts is to organize them into a clear hierarchy. This can make it easy to pinpoint the categories you need to access.
You can either organize by numerical codes or by starting with general categories and expanding into subcategories.
Ensuring Consistency And Accuracy In Account Classification
It’s also best to have consistency and accuracy in classifying your accounts. The benefit of this is maintaining organization and ensuring you don’t miss any recording of financial data.
Incorporating Regulatory Compliance Requirements Into The Chart Of Accounts
Incorporating regulatory compliance requirements can secure your business finances and maintain compliance protocols. This can allow you to avoid any unnecessary fees and fines from accruing.
Update Your Chart Of Accounts Consistently
Another great practice is to continue updating your chart of accounts with new financial information. By updating consistently, you can optimize areas of your finances in real time.
As a dispensary evolves and grows, its business operations may change from adding new product lines, expanding into new markets, and diversifying revenue streams.
Updating the chart of accounts allows the organization to capture these changes accurately and reflect them in its financial reporting and analysis.
Also, you should update them at the time there are evolving regulations at the local, state, and federal levels.
Regulatory changes may impact accounting practices, reporting requirements, tax treatments, and compliance obligations for dispensaries. Updating the chart of accounts ensures that the organization remains compliant with current regulations and incorporates any changes in accounting standards.
Aside from business growth and regulatory changes, you should update them when your financial numbers change.
A good ideal schedule is to update finances at the beginning of the new year and when your business is expanding. Other than that, always input new information consistently.
When To Hire A Cannabis Accountant
You can hire a cannabis accountant when your business is scaling larger and you need extra hands to help navigate your finances like a dispensary chart of accounts.
Or if you need to focus on working on your business rather than in your business, then hiring an expert to handle the financial tasks can bring back time to you. They can also help with bookkeeping for dispensaries like we do at Green Space Accounting.
You can also consider hiring an accountant if you’re a start-up dispensary or business. When establishing a new dispensary, hiring a cannabis accountant in the beginning stages can ensure that financial systems and processes are set up correctly from the beginning.
A cannabis accountant can assist with entity formation, tax registration, compliance with regulatory requirements, and setting up accounting software or systems tailored to the unique needs of the cannabis industry.
We, at Green Space Accounting, can help you manage your finances whether you are a new or large-scale business.
We provide financial analysis, budgeting, forecasting, and other management accounting services to help dispensaries and cannabis-related businesses optimize performance and achieve their strategic objectives.
Contact us today to explore your financial options.
