25 May Chart of Accounts: the basics
Chart of Accounts is one of the main tools used by your finance team. Well designed accounts are quite important for management and investor friendly reporting, allowing you to keep good track of what is happening inside the business. In simple language, we attempted to explain something over which accountants tend to get very excited about: Chart of Accounts.
What is Chart of Accounts and why is it important?
The Chart of Accounts (COA) is a listing of all the individual accounts in the General Ledger that has the name, the description and account number. Designing COA is identifying the buckets for all the current and future transaction in the company. The properly designed COA helps you tidy up and keep track of all incoming and outgoings of the business.
What are the major types of accounts that you expect to see in Chart of Accounts?
The COA is grouped in 5 major buckets: Assets. Liabilities, Shareholder Equity, Revenue and Expenses. Each of these 5 buckets has sub-categories that are specifically designed and customised to your company’s business activity.
Can Chart of Accounts be changed later as the business evolves?
Yes, accounts can be added or subtracted from the COA as the business involves. COA should be detailed but only with the relevant amount of detail. Sales can be broken down into separate product categories to allow you better track what are the main revenue channels. In order to ensure continuity of your business information, you should not change COA in a major way but should plan this well in advance.
How to design best Chart of Accounts suitable for your business?
First and foremost, you should analyse your business data and decide which business transactions you want to track separately. In many cases, those separately line items become budget milestone figures or operational KPIs. It is important to be detailed both on the sales side, not just the expense side as frequently reported.
Who designs and manages the Chart of Accounts?
This will be someone finance/accounting trained – usually the CFO in conversations with the rest of the management and operations team. If well designed, Chart of Accounts will not need many modifications over time, unless there are changes in your business model or local reporting regulations.
Do we have to design Chart of Accounts from scratch?
Definitely you do not have. In finance, you rarely have to reinvent the wheel. If you use cloud accounting software such as Xero or Quickbooks, default Chart of Accounts have already been prepared which can you work with. There are also a number of Chart of Account templates around the web for various types of businesses: i.e. real estate, food and beverage, retail, construction, financial services, non-profit, etc.
If you need help with designing your business Chart of Accounts, do not hesitate to get in touch with us. We guarantee response within 24 hours.