Think of your Chart of Accounts as a collection of buckets. These buckets need to be meaningful in their purpose because they’ll hold dollars of items relating to your business. For example, if you have three checking accounts, you need three buckets on your Chart of Accounts to hold the transactions for each bank account. It would not make any sense to have more or less than exactly one bucket for each checking account.
While it’s standard for most companies to have certain universal buckets (accounts) for assets, liabilities, and equity, the buckets you choose to categorize your business’s revenue and expenses will vary greatly in number and purpose because these are based on your business’s unique operations. It makes sense to create and design your accounts for your specific tax, accounting, and decision-making purposes needs.
Having certain expense accounts matched to the tax requirements can reduce extra work at tax time. For example, separating travel costs – hotel and airfare – from meals and entertainment is a common one.
The ultimate goal is to have a Chart of Accounts that works for you. If, when you first set up your accounting system, you accepted the default Chart of Accounts, it may be time to redesign and restructure the list so it serves your needs better. Below, you’ll find some questions to help guide this process:
- What revenue or expenses do you want to watch more carefully? Should they be broken out in more detail? You may want to use sub-accounts to group transactions.
- Is there cleanup work to do due to misspelling, duplication, or vague account names?
- Have you interviewed all the financial information users in your company to see how they need the data organized?
- What spreadsheets could be eliminated if the Chart of Accounts was better organized?
- Does your Chart of Accounts support your budgeting process? If two people are responsible for controlling spending from one account, would it be useful to break it out?
- Do you have too many accounts? Too few? (Most people have too many due to poor data entry hygiene.)
- Are you properly using other categorizing features in the accounting system, such as items, classes, and custom fields?
- What reports could produce better information for taking profit-focused actions in your business if the Chart of Accounts stored the transactions differently?
- How could key performance indicators be better linked to the Chart of Accounts?
These questions can help you begin thinking about how your Chart of Accounts can better serve you. After all, it’s your business, your accounting system, and your Chart of Accounts. If we can help you through the redesign process, let us know–and be sure to check out our YouTube video to learn more about the Chart of Accounts in QuickBooks with Rhonda Rosand, CPA.