Effective accounting practices demand a litany of skills and knowledge, and fiscal acuity is especially critical for time and resource-challenged small- to medium-sized organizations.
Every buck counts and organizing and reporting on them within a cogent General Ledger not only provides insight and discipline but results in improved processes that impact practical outcomes such as regulatory compliance.
Enter the Chart of Accounts, aka COA, for our current consideration, as a key metric of financial health.
The chart itself consists of a list of numbered accounts, utilizing a name and a short description of what is included in that specific account. Per Unifybooks.com/, these top-level descriptors can be simply viewed as follows:
There is a generally accepted numbering structure for the accounts, so everyone’s accounts appear in roughly the same order and with similar numbering. Account numbers can be appended with three- or four-digit indicators to include added data to signify divisions, parts, products, etc. These are created depending on business composition (large, small, complex, simple) or how detailed its transaction descriptions may need to be.
A COA is designed to provide a view of an organization’s financial situation and health, using a delineated means to separate assets, liabilities, revenue, and expenditures. It assists with management reporting and is critical for meeting the demands of regulatory compliance. It is also crucial for business decision making and course correction, especially when structured to accurately portray differentials such as product sales vs. product returns, or salaries vs. overall productivity.
The goal, again, is an accurate representation of overall financial health.
While flexible in its codification, most organizations choose to utilize a common numerical identification scheme. This can include multiple facets based on specific business needs. Here is a sample list of account numbers to show the de facto standard setup and numbering:
The accounts in the list provide the basic structure for an organization’s financial statements and GL. They are customized to provide the information required for needed visibility, reporting, and compliance. The common best practice categories (usually five) follow. Frequent changes to the numbering structure are not generally encouraged as they can cause confusion, especially if not executed on a regular schedule, such as on an annual basis only.
These “buckets” correspond to different reporting statements, which are generally split to include the balance sheets, income statements, and any work in progress reports. Here the links show examples using a construction company as the business example.
See the list earlier in this document for the specific macro-designations.
That means, in most cases, all your asset accounts will use the number 1, followed by four numbers (1-XXXX), while your liability accounts would start with the number 2 (2-XXXX), and so on through the numeric list.
This is a practical structure for businesses that manufacture or sell products and is a good fit for those looking for added specificity in their chart of accounts structure. Again, using the multiple three- or four-digit sub-account designations will provide more in-depth transaction tracking and overall fiscal transparency.
While the chart of accounts can be similar across like businesses, every COA should be unique to your business. Questions to ask include:
The COA is intricately linked to an organization’s financial statements, as it provides the aggregate data necessary to create them. Each one of the accounts in your COA will show up in your financial statements, and the COA directs where they should appear, i.e., whether they should be in the balance sheet or income statement. If not set up properly, subsequent financial statements will be rife with errors and misinformation.
But what exactly do these statements comprise, and what purpose do they serve?
Financial statements consist of the written records that reflect the state of the business, its fiscal activities, and its overall financial performance. These statements provide the basis for fiscal review by multiple entities, including internal and external accountants and auditors, existing and potential investors, as well as governmental overseers and affiliated regulatory agencies, such as the SEC. These audits and examinations are performed to validate the accuracy and viability of overall financial operations, and the results are used for multiple purposes, such as tax calculations and investment evaluation due diligence.
The three financial statements include:
Need more help? Independent web resources such as the Capterra Small Business Software Site offer great options for completing research and analysis on available solutions, some even offering complementary assistance and matchmaking services to pair your needs with a wide range of offerings. Most providers deliver accounting system products that range from the basics required by a sole proprietor to the sophisticated demands of complex businesses, many with increased scalability
and growth in mind. Some include project management capabilities, collaboration functionality, and workflow, so a good first step is to understand all your fiscal, operational, and process essentials- now and looking forward.
For reference, and in alphabetical order, some accounting software solution vendors and their products include but are not limited to:
Note: These company/product descriptions have been extracted from individual vendor websites. They do not imply endorsement or preference.
A well-organized and descriptive COA can assist bookkeepers, accountants, and financial management of all types to be confident in their business decisions relying on accurate, timely, and relevant information. While with most business processes, here one size does not fit all, and the COA will and should evolve, enabling a greater and more customized view into the true revenue and expense realities of your organization. It also provides external parties with a snapshot view of an organization’s fiscal health for prudent investment, purchase, or approval of credit.
Courtesy of Investopedia with author additions: