Managing the Chart of Accounts is important

Managing the Chart of Accounts is important because it is the foundation of the financial reporting for your business.

A Chart of Accounts is a categorized listing of all the accounts used to record transactions. Managing the Chart of Account is important, however, because without the proper set up and care, it can become oversized and inefficient. Think of a house – is it better to have a sprawling one story with nothing between the foundation and the roof or a two story with layers of ways to track transactions that is both efficient and manageable?

Start by identifying the transactions relevant to your business as assets, liabilities, equity, income, or expenses.

• For each account, there are subaccounts to further classify transactions but be careful not to set up a new account for every transaction you have.
• Use numbering or coding systems to organize accounts logically. For instance, assets should start with numbers 1000-1999, liabilities 2000-2999, equity 3000-3999, and so on.

Keep your Chart of Accounts simple and manageable. A balance between granularity and simplicity is key.

• Aim for a structure that provides enough detail to analyze your finances effectively without overwhelming complexity. It should be a good short story not a novel.
• Utilize locations, classes, and tags to provide additional details for reports within an account without adding extra sub accounts. For example, a construction company will have a Labor account under Expenses and then use classes to capture foundation, framing and trim labor.  A chain of stores can utilize locations instead of duplicating accounts for each store.

What to Avoid:

• Failing to review and update the Chart of Accounts regularly to accommodate changes in your business operations or financial reporting requirements.
• Neglecting to train staff or stakeholders on how to use the Chart of Accounts effectively, leading to errors or inconsistencies in financial records. Be careful not to fall into the scenario of too many cooks in the kitchen.  Set permissions for all users to avoid unnecessary additions of accounts.

The Chart of Accounts provides a systematic way to classify financial transactions and is the basis for preparing financial statements so creating and maintaining it properly is a crucial step in organizing your financial data effectively. If you plan on doing it yourself, have a bookkeeper or accountant review it before you start using it – it is always better to ask permission than forgiveness and a Chart of Accounts cleanup is messy, time consuming and expensive.