Understanding Your Chart Of Accounts

Understanding your Chart of Accounts (COA) and how to make it work for you:

What is a Chart of Accounts (COA)?

Companies use charts of accounts to keep track of transactions in their general ledger by identifying the accounts they have created. Charts of accounts can be tailored to suit company needs, including the addition of accounts when necessary.

A COA is intended to separate expenditures, revenue, assets, and liabilities to illustrate the financial health of a company. As well as meeting the information requirements of management, a well-designed COA assists a business in complying with financial reporting standards.

With the COA, accounts will be typically listed in order of their appearance in the financial statements. Generally, balance sheet accounts, including current assets and current liabilities and are listed first.

Most bookkeeping platforms will have a standard COA so that it is quick & easy to use but you should be able to customise this.

Your COA will be grouped into the following categories:

-???????Revenue

-???????Expenses

-???????Assets

-???????Liabilities

-???????Equity

Depending on your software they might also be broken down into sub-categories.

Your COA will probably be set up by one of 3 people:

1) External Accountant

2) Bookkeeper

3) Biz Owner

This is the problem with each:

1) External Accountant

They will have their own way of doing things, probably structured to make the end-of-year accounts and tax returns as easy as possible.

They will want consistency across all of their clients as much as possible rather than what's best for your business.

2) Bookkeeper

As the person actually keying in the transactions they will set up your COA to make their life as easy as possible when doing the bookkeeping (understandable).

3) Business Owner

Most likely left the standard COA alone as they have no idea what this is or why they should change it.

OR

They have had a play around, have no idea what they are doing and made a mess of it.

Why it matters!

The COA forms the structure of all your financial reporting.

If you don't have a COA configured to your business needs, then you have no hope of getting good management information from it!

Here are some tips on what to consider:

Break down big categories into smaller accounts

When producing reports it is easy to group these backups, but very hard to split out one large generic group into smaller accounts (usually a manual job).

Don't go too crazy though

The more accounts you have the more intricate and slower it is for your bookkeeper to enter.

It also opens them up to more mistakes and a lack of consistency in posting - a cardinal sin in financial reporting!

Always split your Sales into multiple categories that are meaningful to you

These could be your product/service lines (if you have a few) or sub-categories if you have many line items.

Make sure your Expenses are correctly broken down between Cost of Sales and Overheads.

Start with the end goal in mind. Think about what reports & KPIs you want to create from your reporting and use this to guide your COA.

Ask your tax accountant what information they need at the end of the year & make sure your COA provides this. For example, good accounts to keep separate are: - Staff Entertainment - Business Entertainment - Fines & Other Disallowed for Corporation Tax

Finally, make sure your COA is structured to accurately report on your drawings as per your company structure. i.e.

?- Separate Directors' Loan Accounts for each Director

- Dividend account for each class of shares

- Capital accounts split by share type.

Creating a COA that is bespoke to your business is an art form. For the most part, it is a one-off job & worth the effort (There will be new accounts added in the future). It offers the capability for a company's management to easily record transactions, prepare financial statements, and analyse revenues and expenses.

Your COA provides the structure for great reporting!