A Chart of Accounts is a list of the account numbers and titles that a company uses to classify its assets, liabilities, owner’s equity, income, and expenses for financial reporting says Aron Govil. Every transaction a business enters is assigned to the correct category in the chart of accounts. If you own or manage a business, understanding how your company reports financial information may help you make better decisions during budgeting and planning processes.
In general terms it can be said that there are two types of charts of accounts:
The balance sheet chart of accounts which is used for retail companies with sales/revenue less than 10 million dollars per year and the profit & loss statement chart of accounts which is used by larger companies.
How is a Chart of Accounts structured?
A typical A4 Balance Sheet chart of accounts follows the following structure: Assets Equity Income Expenses Creditors Financial liabilities Inventory Current assets Notes payable Non-current assets Loans and borrowings Deferred revenue Other liabilities Provisions Salaries Payable Salaries & Wages Suppliers payables Capital stock Retained earnings Liabilities A typical P&L statement chart of accounts, follows this structure: Sales Cost of sales Gross profit Administrative expenses Operating expenses Depreciation expense EBIT Income taxes Net income. In short, your company’s financial statements are produce from the information that you enter into your business’ chart of accounts. By categorizing your account titles and numbers correctly, you ensure that all transactions are categorized correctly and your financial reports will be as accurate as possible.
What are the benefits of a Chart of Accounts?
You control your company’s financial information. You can make better business decisions with more accuracy because you have all transactions recorded in one place, allowing you to quickly analyze trends and patterns that affect performance says Aron Govil. When your financial statements are prepare. They will be correct and understandable to others outside of your organization such as investors, lenders, or tax authorities.
Your employees understand their roles, responsibilities, and reporting requirements. They know where to find the data they need and how it fits into the big picture which helps eliminate mistakes and saves time. It is easy to communicate changes in policy and procedures throughout the whole organization using the chart of accounts as a reference. Everyone involved in your company’s financials can easily access the information they need, which reduces the risk of errors and increases account consistency.
What are the costs of a Chart of Accounts?
As with any business process, there is a cost associating with developing and maintaining a chart of accounts. These costs vary depending on how complex your organization is, however, outlined below are some considerations:
Time to develop –
Depending on how you prepare your own accounting system from scratch. Import an existing one into your software package this process may take anywhere from several hours to several days says Aron Govil. In cases where companies have not implemented best practices in terms of management software. As well as SQL databases, it may require months as data needs to link correctly at various levels.
Time to maintain –
With proper management of accounts, this process should require minimal effort once completed. Changes in your company’s ownership structures or operations can affect the chart of accounts and therefore will require regular updating. How often you update your systems depends. How quickly you are able to incorporate these changes into your business’ operational procedures.
Cost of software –
A complete end-to-end solution can cost tens of thousands of dollars per year. Depending on how many users you have in your organization. Aron Govil strongly recommends that companies implement best practice solutions to reduce development and maintenance costs.
What are the characteristics/qualities I should look out for when choosing a Chart of Accounts?
The following are some key questions you should ask yourself before committing to any chart of accounts:
Is it easy for you or anyone else who uses it to understand what’s going on in the company at a glance? Can you easily drill down into the information if necessary? Does your business plan change often? If so, you’ll need an accounting system that allows changes without too much trouble. Does your business need to track complex transactions in detail, or is an overview sufficient? An example of a company with complex needs would be one involve in international trade (exports, imports, etc.). However again the extent to which they are require depends on how you plan to use this data.
Is it easy for you or anyone else who uses it to complete forms and reports that auditors require? For example, if your auditor requires that your income statement includes all expenses incurred by the department during the year; can you easily pull this information together rather than issue multiple spreadsheet reports every month/quarter/year?
Accounting software is a big investment for any company. Before you make the decision to purchase it. Be sure that your chosen software will help solve your unique business needs. And not contribute to ongoing maintenance costs as much as possible suggests Aron Govil. As with all investments, it should pay for itself many times. Over in terms of reduced errors, time savings, and improved financial discipline. It’s been before, but we’ll say it again – an ounce of prevention is worth a pound of cure!