Re-Imagining Your Chart of Accounts
The chart of accounts is the backbone of your accounting records. It is a list of all of the accounts—bank, loan, asset, revenue, and expense—in your general ledger, which holds all of your accounting transactions.
Think of your chart of accounts as a collection of buckets that hold dollars of items related to your business. Each bucket should be meaningful and have a purpose. For example, if you have three checking accounts, you need three buckets on your chart of accounts to hold the transactions for each bank account. It would not make sense to have more or less than one bucket for each checking account.
While it’s standard to have certain buckets or accounts for assets, liabilities, and equity, the number of buckets you create for revenue and expenses can vary greatly from company to company. It’s a good idea to create and design your accounts for what your business needs for taxes, accounting, and decision-making purposes.
Let’s say you’re a hairstylist. Do you want your revenue to be in one big bucket? That’s all Uncle Sam requires. But for decision-making purposes, you may want to separate men’s and women’s services, or cuts versus color and other treatments, or both. In that case, you would have four revenue accounts: men’s cuts, men’s color, women’s cuts, and women’s color. This type of detail would help you see where your revenue is highest so you can better manage your supplies and target your marketing.
Having certain expense accounts matched to the tax requirements can reduce extra work at tax time. For example, separating travel costs—hotel and airfare—from meals and entertainment is a common practice, as is keeping meals and entertainment separate.
The goal is to make your chart of accounts work for you. If you accepted the default chart of accounts when you first set up your accounting system, it may be time to redesign and restructure the list so it better serves your needs.
Here are some additional considerations:
- What revenue or expenses do you want to monitor more carefully? Should they be broken out in more detail? You can also use sub accounts to group transactions.
- Is cleanup work required due to misspellings or other duplication?
- Have you interviewed all the financial information users in your company to see how they need the data organized?
- What spreadsheets could be eliminated if the chart of accounts was better organized?
- Does your chart of accounts support your budgeting process? If two people are responsible for controlling spending from one account, would it be useful to break it out?
- Do you have too many accounts? Or too few? (Most people have too many due to poor data entry hygiene.)
- Are you properly using other categorizing features in the accounting system, such as classes, divisions, and custom fields?
- What reports could produce better information for taking profit-focused actions in your business if the chart of accounts stored the transactions differently?
- How could key performance indicators be better linked to the chart of accounts?
These questions can help you begin thinking about how your chart of accounts can better serve you. After all, it’s your business, your accounting system, and your chart of accounts.
If you need help through this redesign process and organizing your financials, reach out to First Steps Financial to learn how our team can assist you. Click here for a free consultation.