Using accounting software makes it seem like a “no-brainer” to set up the Chart of Accounts for your business or non-profit organization. Just select a sample chart and away you go, adding additional accounts on the fly as new expense categories emerge.
Sadly, it is the “no-brainer” part of this process that results in a cumbersome Chart of Accounts and a General Ledger with transaction details scattered across multiple accounts. My rule of thumb is this: if your chart of accounts is over 3 printed pages long or you have any accounts with less than $500 posted during a year, you’ve missed the whole point of your accounting system. And you’ve been led down this path, usually, by QuickBooks.
The purpose of the Chart of Accounts is to arrange your transactions in a standard format which achieves the following:
- Year over year comparability
- Comparability with similar businesses or operations
- Ratio Analysis
- Financial Reporting in accordance with GAAP
- Tax Reporting in accordance with IRS requirements
A Chart of Accounts that tries to incorporate departments or divisions into the numbering scheme rather than as account classes (Quickbooks) or departments (other more sophisticated software) will result in a cumbersome system that makes it difficult for management and for outside professionals to efficiently do their work.
Many business owners who also attempt to do their own bookkeeping fall prey to the ease with which accounts can be added and before they know it, they have created a mess which makes it tough to run the business efficiently and to make decisions based on accurate information. Accounting fees for outside CPAs will increase significantly where a client’s Chart of Accounts has been poorly thought out and is way too lengthy.
Those who use accounting software are often not trained as accountants, so don’t realize the purpose of the Chart of Accounts, and its offspring, the General Ledger. Within the General Ledger are all the transaction details, organized by account. The details of your transactions should live here, not in the Chart of Accounts. The General Ledger is meant to be organized by “general” and widely accepted categories.
So, it’s a good idea to meet with your outside CPA every few years to see if the Chart of Accounts can be successfully truncated so that management has more useful information, and the process of preparing financial statements and tax returns is more efficient.