Everything you need to know about your Chart of Accounts
What is the Chart of Accounts?
The Chart of Accounts is a list of your General Ledger (GL Accounts) that make up your financial statements (specifically, your Profit & Loss and Balance Sheet)
Your Chart of Accounts can make or break your financial statements
When set up poorly they…
☹️ Confuse the reader
☹️ Don’t tell an accurate picture of what’s happening
☹️ Make it challenging to draw insights
Here’s are some tips for avoiding these mistakes:
➡️ Understand WHO the readers of the financial statements are
Before we can decide how our financial statements will look, we must understand who is consuming this data.
Your job is to make this data easy for this audience to consume!
➡️ Apply the proper balance between DETAIL and SUMMARY
The readers of the financial statements should be able to grasp what’s happening with the business, with just the right level of detail…
not too much, and not too less.
Avoid using accounts that can be grouped into one while maintaining the same significance
And avoid using accounts that are too general that would require further commentary to understand
➡️ Include SECTIONS
Your financial statements should have a proper order where the readers can understand key accounts and how they relate to one another.
Combining accounts into sections can help improve readability, allowing the audience to grasp what’s happening more quickly
➡️ use NUMBERING
Most Accounting Software will sort your chart of accounts alphabetically by default.
This may not cause much of an issue, but can become challenging to organize as your chart of accounts grows.
Adding numbering helps you maintain greater flexibility in your ordering, and when set up properly, can help the reader spot out patterns in how certain accounts are numbered
➡️ Set up DEPARTMENTAL tracking
Understanding what you’re spending money on is helpful…
Understanding WHO is spending that money is even more helpful
That’s where departmental tracking comes in
Here, you have 2 options:
1️⃣ Utilize a “class” for each transaction
2️⃣ Add each department as a new section on your Chart of Accounts
Those are a few of my suggestions for keeping your Chart of Accounts healthy & clean