When speaking with your finance team or your outsourced accounting service provider, you will often hear them refer to your company’s “Chart of Accounts”.
The Chart of Accounts is key to the implementation and maintenance of robust controls and processes within your company’s accounting and finance function. It provides structure and order to the recording of financial transactions in your company’s accounts and enables real value-added output.
So what exactly is the Chart of Accounts? What is the purpose? Is it the same for every business? Why is it so important to align the Chart of Accounts with your business model?
We have explained it all below!
What is the Chart of Accounts?
A business must maintain an accurate record of its financial transactions. Otherwise, it will be very difficult to monitor the company’s financial position and performance.
All financial transactions should be managed through the Book of Accounts of the Company. The Book of Accounts are the place in which all of the financial transactions and financial activities of a company are recorded (i.e. the accounts of the company).
The Chart of Accounts is the way to implement structure within the Book of Accounts. The Chart of Accounts is the framework or blueprint for establishing, managing and organising all of the financial accounts of a company.
In short, the Chart of Accounts is a structured index of all company accounts, grouped together under various categories depending on the financial activity to which a particular account relates.
The Starting Point
When commencing a new engagement with a client, one of the first actions performed by the CloudCfo Team is to review the company’s existing Chart of Accounts.
This enables our team to understand how the company is currently managing their company accounts. If the Chart of Accounts has not been set-up properly or is not being adhered to when recording transactions, we will help companies to ensure that it is fully optimized to align with the business model.
If a client does not have a Chart of Accounts in place (and this is not uncommon), we will help create a Chart of Accounts which is tailored to their business and for their financial transactions.
Establishing, reviewing and optimizing the Chart of Accounts is one of the first steps in implementing professional standard processes and controls within a company’s finance function. The use of cloud accounting solutions (see below) is the most efficient way to create, manage and monitor the Charts of Accounts.
A Chart of Accounts tailored to your business
There is no standard template for a Chart of Accounts that can be used across every business or business model. The Chart of Accounts should be customized and tailored to reflect the financial activities of each individual company. It should align with the business model of the company.
For example, the Chart of Accounts of a retail business will differ greatly to the Chart of Accounts of an outsourced accounting service provider. A retail business will have financial transactions, and therefore accounts, relating to inventories, stock wastage, suppliers, etc. A service provider that does not have inventory, won’t require such accounts. For more information on accounting for a retail business, check out our recent article on accounting for the retail industry in the Philippines.
Remember though – when considering the structure of your Chart of Accounts, it’s important to ensure that your approach aligns with recognized accounting guidelines, financial accounting standards and generally accepted accounting principles.
Categories within the Chart of Accounts
Notwithstanding the section above, there will be some similarities within the Chart of Accounts between businesses, irrespective of the business model or industry in which a business operates. For example, most Chart of Accounts will usually have the following categories of accounts: assets, liabilities, equity, revenue and expenses.
These categories, will however, include various “sub-accounts”. These sub-accounts will differ depending on the financial activities undertaken by the business.
The following examples will help explain which category an account would be listed under in the Chart of Accounts. For a detailed explanation of what each of the below accounting terms mean, check out our article on common accounting concepts that employers should know.
Examples of the type of accounts that would fall under the category of “Assets” in the Chart of Accounts include: cash on hand, cash in bank, accounts receivable, inventory, property, plant and equipment.
Examples of accounts that would fall under the category of “Liabilities” within the Chart of Accounts include: accounts payable, notes payable and loans payable.
Examples of accounts that would fall under the category of “Revenue” within the Chart of Accounts include sales, service revenue and interest income.
Examples of accounts that would fall under the category of “Expenses” within the Chart of Accounts include payroll, marketing, utilities, rents, insurance, depreciation, interest and office supplies.
Examples of accounts that would fall under the category of “Equity” within the Chart of Accounts include: ordinary stock, preferred stock, additional paid-in capital and retained earnings.
Structuring the Chart of Accounts
The structure of the Chart of Accounts should mirror the structure of the company’s financial statements. This means that Balance Sheet accounts such as assets, liabilities and equity, would be listed first, followed by Income Statement accounts such as revenue and expenses.
It is also important to ensure that the accounts included within the Chart of Accounts include an account for all of the possible financial transactions that might be undertaken by a company. It is important therefore to understand the business model and understand what kind of activities are being actioned on a daily basis. The accountant or finance team should review the company accounts and ensure that there is an account for each activity undertaken.
For ease of reference, each account in the Chart of Accounts should be assigned a unique reference code. These might be numerical codes, alphabetic codes, or alpha-numeric codes. This enables optimization when generating financial reports. With the correct structure in place, all accounts under one category can be easily grouped together in order to generate a report for that specific category of account.
Cloud Accounting Solutions
With technological advancements in cloud accounting solutions, the creation and maintenance of the Chart of Accounts has never been easier.
Most cloud accounting solutions enable you to import your existing Chart of Accounts or customize your own from scratch.
Cloud accounting solutions makes it easy for a company to organise all of its accounts, generate financial statements and reports quickly, identify errors or discrepancies and review historic transactions with ease. Finance teams can benefit from real collaboration through the cloud, both internally within the finance function, or externally with their outsourced accounting service provider.
At CloudCfo, we regularly use Quickbooks Online and Xero on behalf of our clients. As mentioned above, one of our first objectives when engaging a new client is to review their Chart of Accounts, optimize to align with the company’s business model and upload and manage the Chart of Accounts through Quickbooks Online or Xero.
For more information about these commonly used cloud accounting solutions, check out our recent article Quickbooks Online or Xero? It depends on your business.
A structured Chart of Accounts creates value for your business
Having in place robust controls and processes in your company’s accounting function is key to ensuring that your finances are managed properly. The foundation of these processes and controls lies with having a structured Chart of Accounts.
Here are just some of the benefits of having in place a structured Chart of Accounts:
- Management can have a much better understanding of the financial position and performance of the company. With a structured Chart of Accounts at the foundation of your financial reporting, management can receive information that makes sense and paints a true picture of the company.
- A Chart of Accounts enables consistency across the company’s finances. It ensures that the same accounting entries are performed again and again and that there is a clear process and output for recording transactions.
- It also means that accounts can be reviewed and compared over multiple accounting periods. By comparing data from the same accounts on a week-on-week, month-on-month or year-on-year basis, it is much easier to understand where the company is succeeding or failing and make informed commercial decisions based on this information.
- If there is a clear structure and process in place for recording transactions, it is much easier to avoid reporting errors and/or fraud. If transactions are missing, data has been entered incorrectly or funds have been misappropriated, it is much easier to identify discrepancies within a well set-up and properly structured Chart of Accounts.
CloudCfo – Outsourced accounting, bookkeeping and finance services in the Philippines
If you want to implement and maintain robust processes and controls across your accounting, bookkeeping and finance function, don’t hesitate to contact CloudCfo today.
Our teams are intensely process-driven and output focused. We perform all of our services through cloud accounting solutions and smart technology!