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The Chart of Accounts is the list of all the accounts you use to book financial transactions that occur in your business. For double-entry accounting, the type that uses debits and credits that offset each other, each transaction will hit two Chart of Accounts accounts. There are five main categories these accounts will fall into:
Now let’s dive into some considerations on how to structure your Chart of Accounts so you get the most out of it. This is not an exhaustive list of considerations, and we won’t cover what you should add to your Chart of Accounts because that will be specific to your business. However, as you sit down to design it, thinking about each of these items will ensure you get a great outcome.
There are two sets of industry standards that govern best practices for US companies’ financial reporting - Generally Accepted Accounting Standards (GAAP) and Financial Accounting Standards Board (FASB). It is important that you understand these standards at least at a high level before undertaking any project related to bookkeeping or restructuring your Chart of Accounts. If you don’t want to research the accounting principles related to these standards, it might be helpful to contract with an knowledgeable outside party to review or create the Chart of Accounts under your direction.
In addition to the specifics of these standards, a common best practice is not to change the Chart of Accounts too much after it has been set. You want a consistent way to judge the company’s performance period over period, and cannot do so if the numbers fall into different buckets each period.
Before getting too deep into the weeds of the rest of these items, sit down and think out all the ways the Chart of Accounts will be used. Here are some items I would consider:
This type of strategic thinking will serve you well as a guidepost when making the more tactical decisions to come.
This is probably where most of the time will be spent. The naming convention is arguably the single most important piece of the project. Here are some considerations:
One way to add extra richness to the level of detail in your Chart of Accounts is to add account numbers. Like account names, this too has its own special considerations.
This one is tricky. Basically, you want only the amount of detail you need to get the job done, and no more. Account structures that get too granular rarely get used correctly, thus making the data a mess. If people have too many options, they will naturally tend towards putting things in the first thing that sounds remotely close to their option instead of scrolling through the hundred others you’ve given them. Early in my career, I didn’t understand this and would create way too many accounts. After years of seeing how people actually interact with the Chart of Accounts, I lean towards starting leaner and expanding as needed based on actual reporting requirements.
For example, if the expense isn’t a closely monitored cost-center, I am not going to create ten different Dues and Subscription related accounts. You will get a sense over time for what you need, but I recommend you think about collapsing as much as you can to start, and expanding as you go. Just like salting you food, you can always add more, but it is hard to take away.
For answers to questions you have about this or related topics, schedule your free consultation today.