Setting Up a Chart of Accounts- Guide for Business Owners
Setting up a poorly designed chart of accounts can lead to significant financial management challenges, operational inefficiency and long-term failure. Unfortunately, most companies lack the accounting expertise and experience to design an effective Account Listing. Following are a few key suggestions to help:
Create a single chart of accounts
Consolidate across all business units to simplify consolidation and reporting. Ultimately, most accounts will be the same regardless of location or operational area. This will allow for uniform numbers globally across the company.
Use simple, easy-to-understand logic and account definitions
You want to make sure you are promoting clarity regarding what each account should or should not be used for. If the account structure itself is overly complex, the entire accounting system will suffer and additional accounting issues will result in the form of clarifications and corrections. We suggest using something as simple as beginning all asset accounts with the number 1, liability accounts with the number 2, equity accounts with the number 3, income accounts with the number 4, cost of goods sold accounts with the number 5, and expense accounts with the numbers 6 & 7.
Minimize the number of accounts involved
Create a manual that indicates how to post certain complex vendor transactions- like those with split accounts. This will help to reduce the occurrence of repeat and redundant accounts and eliminate confusion in transaction posting and reporting. In addition, fewer accounts allow for increased efficiency, which allows for increased processing speed and reduced accounting time and resources. It’s really a balancing act between the number of accounts and the amount of detail required.
Make sure your systems allow for the capture and tracking of other relevant financial and operational information. The inclusion and allowance for information such as departments, internal transactions, projects, etc. makes the entire system more efficient and thus more valuable in the long run. It also allows for the elimination of accounting staff/resource waste such as the repetitive need to assign accounts to specific ends.
Consider the future
The best designed charts will allow for future changes and growth that accommodate both business and regulatory requirements (as well as reporting and operational needs). In addition, a proper system will allow for complete shifts such as those involved in acquisitions and mergers. This involves structures and ranges with sufficient room for expansion and ensures an effective system that remains relevant and useful.
In the end, the value of experience and proper planning in the establishment of your Chart of Accounts cannot be overestimated. So, if you’re in the process of creating your Chart of Accounts or would like some assistance revising or redesigning your system, let’s get started with a free discovery call to see how we can help.