The importance of the chart of accounts is often overlooked. The chart of accounts is the basis for all your financial reporting and if not organized properly the chart of accounts isn’t working for your business.
Issues with Chart of Accounts Design
Excessive General Ledger Accounts: The number of general ledger accounts tends to grow over time. When in doubt where to put a transaction, an untrained bookkeeper will often create a new GL account (very easy to do in QuickBooks).
Poor Titles: Using acronyms or incomplete names for general ledger accounts is confusing for those trying to interpret your financial statements.
Too Much Expense Detail: Yes, too much detail can be a problem. Similar to creating too many general ledger accounts a bookkeeper may set up numerous accounts with minimal balances. In the end, small items are being tracked separately and creating an excessively long chart of accounts.
Not Enough Detail in Revenue and Cost of Goods Sold Categories: On the flip side of too many expense categories, we often see revenue as one line item (normally “sales”) and one category as “Cost of Goods Sold.” While that may seem reasonable, many accountants prefer to manage profitability by controlling costs. You can create more value by managing above the line or gross margin with your COA.
Cost of Goods Sold Not Aligned with Revenue: We often see revenue sorted by product or category and the Cost of Goods Sold being tracked under a different method. Consider sorting revenue by Cost of Goods Sold using the same method so you can manage gross profit by category.
Duplicates: General ledger accounts being duplicated is very common. For example, an account for “office expenses” and “office supplies” are duplicative. There is no need for that level of separation.
Product or Service Tracking: If part of your strategic plan is to track growth and profitability along product or service offerings you should have that level of detail in your chart of accounts.
Grant Tracking: If you are a non-profit it’s important to have your chart of accounts set up to allow for proper grant tracking and allocation of restricted and unrestricted funds.
Numbering System: Using a numbering system to arrange your chart of accounts is a good idea. Make sure to leave gaps in the numbering to allow for additional accounts if necessary.
Other Important things to Consider if using QuickBooks:
Classes: If you are using Classes make sure to code all transactions with their proper class so that the profit and loss can be generated by class
Items: Make sure to use item codes for each product or service you sell if you want to provide detailed reporting on each product or service
Job Types: If your small business works on projects or “jobs” then coding them will allow you to group like projects for reporting.
Let us help you get more meaningful financial information and restructure your chart of accounts. Contact as www.budgetease.biz to learn more.