Problems in Chart of Accounts Design

See also:
Standard Chart of Accounts
Chart of Accounts (COA)
Complex COA Number for SGA Expenses
Example Chart of Accounts for Selling General and Administrative
Time Saving Tip for Filing Vendor Invoices

Problems in Chart of Accounts Design

Too Many General Ledger Accounts

Often when using QuickBooks or Peachtree accounting software the number of general ledger accounts grow over time. Usually the person entering the data is not a trained accountant. When faced with an accounting entry that is not specifically described by an existing general ledger account they will often set up a new account. It is especially easy to do in QuickBooks.

Too Much Detail in Selling General and Administrative Expenses

Similar to the problem mentioned above, often the person maintaining the general ledger is a detail oriented employee. This trait is both a blessing and a curse. The theory goes as follows: If a little detail is good then a lot is better! In order to get more and more detail on the general ledger they set up new general ledger accounts. In the end they are counting paperclips with numerous accounts with less than a thousand dollars charged to them.

Not Enough Detail in Revenue and Cost of Goods Sold Categories

Often revenue consists of one line item labeled “Sales” and “Cost of Goods Sold” as another line item. On the other hand there is considerable detail in Selling General and Administrative expenses. Most accountants manage profitability by controlling costs, however, you can create more value by managing “above the line” or gross margin.

Cost of Goods Sold Not Aligned with Revenue

It is not uncommon to see revenue sorted by product or category and the Cost of Goods Sold being tracked under a different segregation. You should sort revenue and Cost of Goods Sold by the same methodology so you can manage gross profit by category.

No Logic in Assigning General Ledger Account Numbers

Account numbers, especially in Selling General and Administrative expenses, are not assigned in any logical order. Accounts are not entered alphabetically or within a logical grouping. Consequently, it is difficult for the clerical staff to code payables properly or consistently.

Poor Titles on General Ledger Account Descriptions

In some instances, you may use acronyms to title accounts. This makes it difficult for a reader of the financial statements to decipher the accounts.

Inadequate Detail in Chart of Accounts

Too little detail in the chart of accounts can be as bad as having too much. An example is having two inventory subsidiary ledgers posting to one general ledger control account making reconciliation difficult.

No Departments, Product Lines or Regional Data Tracked

Part of a company’s strategic plan should be to manage growth and profitability by major categories. By putting this level of detail in the general ledger, you will refocus management’s focus or target on strategic goals.

Chart of Accounts Does Not Relate Back to Pricing Model

In bidding jobs or quoting sales orders it is important to estimate indirect overhead or direct overhead. If you do not compare these estimates to actual results, then over time profitability may suffer.

Using the Chart of Accounts for Job Costing

In companies where job costing is important it is common to see the Chart of Accounts used to track job cost. This is a result of not setting up the accounting software properly or not purchasing the appropriate accounting software package.

No Standard Chart of Accounts for Different Companies

In this situation multiple companies are either formed or acquired over time. Because they are often in different industries, use a different Chart of Accounts for each company. It would be preferable to use a standard Chart of Accounts customized in the few areas necessary.

Too Many Digits in Chart of Accounts Numbering

Accountants trained in a large company environment often bring that same logic to an entrepreneurial company. The result is an account numbering system six or more digits long. Most modern day accounting software use departmental accounting making the required digits to be no more than five.

Not Using a Numbering System

QuickBooks is great accounting software for beginners and non-accountants. Consequently, use an alpha system to establish the Chart of Accounts. This practice makes it difficult to sort accounts in anything other than alphabetical order.

Using Alpha Numeric Chart of Accounts

Another problem is using a combination of alpha/numeric accounts. Just as using alpha only systems causes organization problems so does a combination of alpha/numeric.

Not Leaving Gaps in the Numbering System

When you set up a chart of accounts for the first time, assign account numbers sequentially. Later when you want to add an account in alphabetical order there is not a gap in the numbering system to allow you to insert the new account.

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Problems in Chart of Accounts Design

 

Problems in Chart of Accounts Design

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11 Responses to Problems in Chart of Accounts Design

  1. M Craig September 3, 2014 at 3:36 pm #

    Using alpha numeric chart of accounts

    Another problem is using a combination of alpha/numeric accounts. Just as using alpha only systems cause’s organization problems so does a combination of alpha/numeric.

    cause’s ???

    Come on, guys. No apostrophe in the word “causes”.

    • Olivia Durr September 10, 2014 at 12:10 pm #

      Wow – great catch on that typo. Hope the article was useful otherwise. I’m fixing that typo now!

  2. kaleab A February 21, 2015 at 6:25 am #

    how displayed execs digit number in peach-tree account in trail balance?
    for example my entry data displayed in trail balance like this????????????????
    so how come solve problem?

  3. Chuck Tharp June 28, 2015 at 8:04 am #

    Good article, confirms that many of my concerns and difficulty , were normal.
    Also your article helped formulate my solutions.

  4. Tai Ben November 21, 2015 at 1:03 am #

    These seem to be general problems but for SMEs what structure will their chart of accounts be.

  5. Lisa March 2, 2016 at 2:02 pm #

    I don’t understand this section and I’m hoping you can explain in more detail:

    “Using the Chart of Accounts for job costing

    In companies where job costing is important it is common to see the Chart of Accounts used to track job cost. This is a result of not setting up the accounting software properly or not purchasing the appropriate accounting software package.”

    We are implementing a new accounting/project management tool in part to do a better job with job costing. We have been told that our first step must be to map our job cost structure to our Chart of Accounts. That seems to conflict with the problem you identified above. Thanks for your help!

    • Angel April 24, 2016 at 12:28 pm #

      Excellent point about not getting the appropriate accounting software package. There are many specifically designed for building & construction, other contract based companies,etc. There is even specific ones for service businesses, restaurants, daycare or other home based businesses…
      Its all about doing your homework ahead of time.

  6. herschel hatcher March 3, 2018 at 9:46 pm #

    We are starting up a company that will manage healthcare projects. Our company will earn a management fee on each project we mange. These healthcare projects can be owned by by different investors. Our company will have an equity investment n some projects.

    I want to be able to track the revenue and expenses by project.

    The chart of accounts will have codes for department numbers, revenue and expenses but I need code for each project.

    How is the best way to set up the chart of accounts to accomplish this?

    I could see the following set up

    Project Number 100
    Revenue
    Expenses (by department)

    This would hopefully produce an income statement for Project #100

    • JOhn April 11, 2018 at 4:26 am #

      It may be possible but not necessary for departments to have their own # in COA but not likely for individual projects. Reporting those items would most likely be handled at upper levels of software. COA #’s should pretty much be set once or eventually get to a point where very little changes in the structure.

  7. Monica April 30, 2018 at 5:18 pm #

    Would it be considered poor design of the chart of accounts if all of the revenue ledger numbers had 6 digits while all the rest of the ledger numbers had 5 digits? Thanks!

  8. Monica April 30, 2018 at 5:28 pm #

    Regarding the question I just asked about the number of digits – I guess the chart of accounts wouldn’t display correctly (in the right order) if each account wasn’t the same number of digits. I’ll have to rethink the numbering for the revenue accounts. This article is very helpful, thanks!

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