Thursday, June 28, 2007

Designing your chart of accounts

Before you even start using your system, whether manual or computerized, you need to design your chart of accounts. How you design your chart of accounts is very important in ensuring that the work you do is streamlined and that reports required by management are available "at the press of a button".

Chart of accounts defined
A Chart of Accounts is a list of accounts that your business will be using and are essentially classification of transactions. Every transaction needs to be recorded under an account.

Classifying transactions
Transactions fall into four broad categories as follows:
  1. Assets or what the business owns or is owed,
  2. Liabilities what the business owes
  3. Income, business income, and,
  4. Expenses, what the business incurs in generating the income in (3) above.
These will then have to be further broken down into smaller classifications. For instance, the asset category can be broken down into the following:

  1. Fixed Assets - assets that have a life time value to the business of more than a financial or calendar year, for example a car which can have a minimum beneficial value of 5 years to the business.

  2. Current Assets - assets that have a life time value of less than a financial or calendar year, for example an amount owed by a customer that is payable in the next 30 days.
Confused? Don't be. Let's go back to the statement of "list of accounts that your business will be using" and examine that.

Differences between businesses
Not all types of businesses have the same requirements. For instance, a construction or manufacturing company would need an account called "work-in-progress" to keep track of the value of work or goods that is incomplete or unfinished.. A trading or wholesale company would require an account called "stock" to track the goods that they have for sale.

First step
So the first step would be to identify the classifications or accounts that you would need. If you are an existing business, then the best place to start is with your audited accounts. Bear in mind that audit reports are essentially abridged versions and you will need to expand on it to suit management reporting requirements. For instance, the audited accounts would only indicate total income, whereas management would prefer to know details of where that income is coming from. As an example, total income may come from the sale of products as well as the servicing of the product.

Get input/feedback
Using the audited accounts as a basis, expand on the details. Don't however go into too much detail. Your chart of accounts will then become too cumbersome. Speak to management and find out what information they need to make business decisions. Speak to your auditors and find out what kind of detailed information they need. Try to balance the two.

Account numbering
If the system that you are using requires account numbering, space the numbers out by 5s or better yet 10s. For example, if the first account is numbered 1000, the next should be 1010 and the following 1020, and so on. This would give you the leeway to add an account in between without having to re-number. Number your accounts in the same order as the four broad categories of transactions stated above, i.e. all fixed assets, then liabilities and so on.

Do keep in mind that, as with most other tasks, you will never get it picture perfect at the onset. In time, you will need to add or delete accounts, so if you have followed the steps above, you will have something to start with that has the flexibility to grow along with the business.

The amount of time you spend in this initial stage of designing your chart of accounts will go a long way in improving the efficiency of your work, and will enable you to produce management reports "at the press of a button".

Sample chart of accounts

Account Number
Account Name

Bank account
Cash in hand/petty cash

Deposits paid

Trade Debtors
Computers & Peripherals

Trade Creditors
Hire purchase creditor

Paid Up Capital
Retained Earnings
Current Earnings


Currency Gain/Loss

Cost Of Sales

Rental & utilities
Office rental
Telephone & Internet
Postage & Courier
Hire purchase interest account
Bank charges
Traveling & accommodation

Petrol, Parking & toll
Training & seminars
Repairs & maintenance
Salaries, wages and allowances


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Uhlenbrock CPA said...

Great Blog!
The financial transactions of the business are identified, recorded and classified in different books is one of the main task of bookkeeping services. I was searching for
bookkeeping services in San Antonio and got your post.

Thanks for the detailed post.