What is a Chart of Accounts in Bookkeeping for Entertainment Industry?

Accountants have discovered a glamorous niche in the multibillion-dollar entertainment industry. It offers financial services to Hollywood studios, production companies, and a wide range of artists and technicians. It includes big-name movie stars and music industry tycoons, truck drivers, and B-movie bit players. In this article, we will discuss in detail the role of charts of accounts in the Entertainment Industry and how (COA) helps to keep track of financial records of an ever-growing industry.

The entertainment industry is also one of the fastest-growing businesses. It also needs to maintain financial records accurate and précised. So like any other industry, a well-organized Charts of Accounts (COA) plays an essential part in the entertainment industry.

Introduction to the Charts of Accounts 

A chart of accounts (COA) is a financial and organizational tool that lists every account in an accounting system, giving information on the company’s financial transactions. A business can modify its chart of accounts to best meet its requirements by adding accounts as necessary.

You must always record transactions in the appropriate account, whether a new loan from the bank, a client’s invoice, or a laptop for the office. How do you figure out which account to record it in, though? It is in the chart of accounts.

A chart of accounts lists your business’s “accounts” gathered in one location. It gives you a bird’s-eye view of every part of your industry that imposes expenses or generates revenue. The primary accounts are Revenue, Expenses, Assets, Liabilities, and Equity. Different businesses have charts of accounts that appear differently. By detailing all the accounts implicated in your business’s daily activities, the chart of accounts provides a general understanding of the nature of your organization.

What Is Entertainment Industry?

Film, television, radio, and print all fall under the umbrella of the media and entertainment sectors. These categories include films, television, radio, music, publications, newspapers, and books. The media and entertainment sector draws people from various backgrounds and personalities. The entertainment industry welcomes creative individuals. Such people are talented at prioritizing and evaluating news, drafting business strategies, making deals, proposing and selling, promoting new, or crunching data. The top 10 media and entertainment organizations include: 

• Walt Disney Company, 
• Time Warner Inc.
• McGraw-Hill Companies 
• DIRECTV Inc.
• Viacom Inc.
• Comcast Corporation 
• Paramount Pictures Corporation
• Hearst Corporation
• News Corporation 
• CBS Broadcasting Inc. 

Analysis of the Entertainment Industry

The media and entertainment sector generates over $2 trillion in revenue globally, making it a large customer base, and the USA alone accounts for more than a third of the industry’s revenue. According to the International Trade Administration (ITA), a U.S. government body, the media and entertainment (M&E) industries’ sales will reach $825 billion in 2023.

Entertainment Industry and Its Types 

We have a massive Entertainment Industry which divides into many small industries.

Film Industry

The film industry created almost $110 billion in revenue in 2019. Movies, television shows, and videography make up the majority of this industry’s activity.

Music Industry

The music industry encompasses recorded music and performances, including concerts. It also includes a wide range of transmission methods, with digital music quickly replacing older formats like tapes and DVDs. In 2019, total revenue generated by the music industry was around $22 billion, with the anticipation to rise further. 

Book Industry 

Publishing books, Hardcopy, and digital books also represent a rapidly evolving financial landscape, with a $138 billion market in 2021. Popular consumer books command the largest market share, led by books for professionals and academics.

Gaming Industry

Video games, this quickly expanding M&E industry generated $26 billion in revenue in 2019 thanks to a variety of gadgets such as phones, computers, gaming consoles, and virtual reality equipment. Esports (competitive gaming) and gambling games are becoming more and more well-liked, which has accelerated the growth of this industry.

Bookkeeping in Entertainment Industries

The costs associated with providing consumers with movies, videos, books, periodicals, and music are high for the entertainment industry. Therefore, setting up a reliable, effective bookkeeping system for your entertainment business guarantees that you stay within your production budget and make the most money possible.

Specifics

The entertainment industry does not follow any special form of bookkeeping method. However, some procedures are mandated by controlling sources. The Internal Revenue Code determines the treatment of income for tax purposes in the production sector of the industry. Accounting standards provided by the AICPA and other regulatory agencies control financial statements.

Cost Bookkeeping for Entertainment Industry

Businesses usually require two levels of bookkeeping and accounting. Regarding accounting for the cost of routine operating tasks, the first level of bookkeeping is like any other type of firm. Expenses for operational salary, human resources, rent, utilities, and office equipment and supplies are a few examples of such bookkeeping components. We refer to this as “outside accounting,” as all expenses cannot cater to the movie’s production budget.

The same movie production firm also handles bookkeeping and accounting on a secondary level. This level of accountancy is referred to as “inside accounting” since it involves recording costs in the production budget. These costs frequently include performers, stage hands, set builders, grips, and gaffs. To ascertain whether your movie is on budget, this tier of bookkeeping is entirely distinct from the outer accounting. This issue was raised in the Buchwald vs. Paramount legal battle over the film “Coming to America.”

Income Prediction for Entertainment Industry

A filmmaking business typically rarely deducts the first year’s production costs. The accepted practice for taxpayers in the entertainment sector is to account for premises that the IRS deems appropriate using the income projection technique of bookkeeping. These holdings include copyright, film, videotape, sound recordings, and book patents.

The income projection method comprises writing down the cost of manufacturing proportionately. For instance, if a corporation makes 10% of its revenue from a single movie for ten years, 10% of the cost of that movie might be written off annually. Even though there are additional code provisions, too, this one is straightforward.

Considerations for Bookkeeping in Entertainment Industry

Your bookkeeping procedure could change depending on the type of entertainment firm. The film and entertainment sectors can choose from several code section options, including the 15-year creative property cost amortization option or the opportunity to deduct the first $15 million of film costs. The final issue, according to Norris, is that production and entertainment enterprises typically need to undertake higher levels of accounting and bookkeeping than other organizations do.

As a result, you need to write down all your changes. Furthermore, all types of accounts are included in one of your financial statements’ main categories. Finally, your cash can fit into one of the following groups:

Accounts on Income Statement (Profit and Loss)

• Cost Expenses
• of goods 
• Other Earnings
• Miscellaneous Charges

Accounts on the Balance Sheet

• Assets
• Liabilities
• Equity of the Film Makers 

Now you don’t need to worry about keeping check of the smallest details of every account and transaction. Now you just need to have a piece of paper and a pen. Just pen down and show accounts that are not classified yet. This way, in the end, you will be able to classify every account.

Account Numbers Chart

The graph of each account’s type identifies the chart of account numbers specific to each account. Therefore, generally of thumb, the following should be applied to account names within these categories:

• 2000 to 2999: Assets
• 3000 to 3999: Liabilities
• 4000 to 4999: Equity 
• 5000 to 5999: Income:
• 6000 to 6999: Expenses
• 7000 to 7999: Cost of Goods Sold
• 8000 to 8999: Other Sources of profit
• 9000 to 9999: Operating Expenses

Account Specification

Asset Account

The factors that make an entertainment industry valuable are all included in its assets. Current assets and fixed assets are the two categories of assets. Within a year, a recent purchase may be sold or redeemed. As a result, the following are a few illustrations of common asset accounts to be aware of:

Current Assets 

• Cash
• Account Receivables
• Petty Cash Finds
• Prepaid insurance
• Allowance for Doubtful Accounts
• Inventory

Fixed Assets

• Buildings
• Vehicle
• Land
• Accumulated Depreciation of Equipment’s Buildings and Vehicles

Liabilities Account

Liabilities in the entertainment sector include money due and other obligations the business must meet. They include short-term and long-term. Likewise, if the firm must repay the debt within the following year, it is a current commitment. Liability accounts, therefore, consist of the following:

Current Liabilities

• Notes Payable
• Accounts Payable
• Taxes on Payroll
• Audience Deposits

Long-term liabilities

• Construction Financing
• Mortgage

Equity

Equity is a term that describes an entertainment company’s book value. So, if you deduct your obligations (debts) from your assets (property), you get your equity (the difference). Also, keeping in mind that your company’s equity accounts depend on its IRS categorization is essential (single, partnership, or corporation). 

Hence, examples of accounts included in the equity section:

• Additional Funds Contributed Upfront
• The Shareholder Draws 
• The filmmaker Equity
• Owned Drawer
• Distributions

Cost of Goods Sold (COGS) Account COA – Bookkeeping For the Entertainment Industry

So, use this account to monitor the actual costs of things created or sold. For a filmmaker, the total price of goods sold (COGS) includes the filmmaking raw cost and the labor expenditures necessary in filmmaking.

Consequently, there would be no consideration for the expense of film advertisement or cost beyond the production.

COGS= Beginning Inventory + P – Ending Inventory

Therefore, P is referred to as purchases during some specific period.

Whereas the cost of making a movie is typically disclosed in these accounts:

• Actors
• Subcontractor
• Human resources
• Labor
• Casting Team
• The Costs Of Using Credits
• Location setup 
• Direction Equipment 
• Overhead Costs For Employees and crew members 

Other Income and Expenses Account of COA

Other Incomes for your movie business is any income that does not tie to your business’s regular operations. Here are some other income accounts:

• Promotions 
• Bank Interest
• Gain On Foreign Screenings
• Payments From Insurance
• The Sale of A Valuable Asset

Other Expenses include additional costs. They are called “other expenditures.” Hence, those may include:

• Seek the advice
• Charges of Damages
• Fraud

Operating Expenses Account of COA

You can learn how to add up all operating expenses, including sales, general, and administrative costs, by looking at all operating expenditures in a certain industry. Consequently, some of the operating costs are as follows:

• Repairs and Maintenance 
• Equipment Depreciation
• Insurance for Film Set Up 
• Mortgage interest 
• Utilities 
• Bonuses for Workers
• Bonus- production house
• Advertisement

Below picture shows the charts of accounts of an entertainment company:

Accounting Rules to Record Expenses

Accounting regulations classify costs as expenditures, and GAAP handles bookkeeping. The filmmaking industries invest money in advertising, promotion, and personal commission to promote films and maintain a profitable business. It is necessary to declare expenses after each financial month. As a result, the general ledger’s transactions and journal entries for the entertainment company are comparable.

According to double-entry accounting, each expense entry must have a debit and a credit and may pay for business costs with cash or a credit card. Therefore, you must collect the relevant information for this transaction. Any written reports must have invoices, account receivables information, or other payment documentation. So, keep a journal where you can record your spending. The paperwork must also include the transaction’s date, the account’s number, title, purchase price, and a short outline. Debits are therefore listed first, followed by payments, in decreasing order of balance.

So by using this formula, you can calculate your company’s operating expense ratio.

(COGS+OPEX) / Revenues = OER

Final Thoughts

Charts of Accounts of the entertainment industry are not among the most thrilling things you have encountered about the entertainment sector because no one publicly discusses the significant income of this sector. However, everyone in this industry knows the value of entertainment and the need to maintain track of its finances.

This article covered charts of accounts and elements of the entertainment sector. We also talked about a few false beliefs about the earnings of the entertainment sector. Revenue, as you can see, is what keeps every firm alive. The entertainment sector is also no different. Businesses in the entertainment industry rely substantially on their revenue to survive. Therefore, these companies need to manage their funds well. To manage their funds well, they need to know and understand their charts of accounts.