Tag Archives | chart of accounts

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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Complex COA for SG&A Expenses

See also:
Problems in Chart of Account Design
Standard Chart of Accounts
Example Chart of Accounts for Selling, General, and Administrative Expenses
Generally Accepted Accounting Principles
Financial Accounting Standards Board

Complex COA / Chart of Accounts for SG&A Expenses

In lieu of a simple chart of accounts for SG&A expenses (selling general and administration expenses), you can design a numbering system with more information and structure.

Once the major class codes have been assigned (i.e. 6NNNNN..NN = Manufacturing Overhead) the nominal accounts such as labor, fringe benefits, consulting fees, supplies, telephone, etc. that have been identified as required accounts during the NAP, should be grouped into natural groupings (1–9) that can be rolled up to facilitate management planning and decision making.

Example of Chart of Accounts for SG&A Expenses

For example in the retail industry, the relationship of total wages and employee benefits (expenses impacted by adding employees) to sales by retail unit, or region, or total facility costs (rent, utilities, property taxes) to sales, provide management important barometers of store managers’ operating efficiencies and expense controls. Grouping the nominal expense accounts (which may total 50 -100 accounts) into the appropriate series, rather than numbering them alphabetically, for example, facilitates the comparison/analysis process.

6NNNNN, 7NNNNN, and 8NNNNN – Operating Overhead, Research, Selling, and General & Administrative Expenses – These divisions facilitate analysis, as in the homebuilding industry, where management may want to compare Construction Overhead and/or Marketing Expenses per unit by subdivision, product line, or geographical area.

9NNNNN..NN – Non-Operating Income and Expenses such as interest income, other miscellaneous income, and interest expense.


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Salary Expense

Therefore, the 100 series may capture salary expense data as follows:

  • Executive salaries
  • Exempt Salaries
  • Non-Exempt Salaries
  • Overtime Compensation
  • Incentive Compensation
  • Vacation & Holiday
  • Sick Leave
  • Others appropriate to the company

Fringe Benefits

The 200 series may include fringe benefits data as follows:

Thus, the 100s and 200s represent the employee expenses that are directly impacted by changes in headcounts. As a result, they can be rolled up into reports by department, state, division, or other management designated requirement.

The remaining groups may be compiled as follows:

Travel & Entertainment

300s = Travel & Entertainment, such as:

  • Airfare
  • Seminar Fees
  • Meals, excluding entertainment
  • Entertainment
  • Auto Rentals
  • Mileage

Office Expense

400s = Office & Other Miscellaneous Expenses, such as:

  • Office Supplies
  • Insurance
  • Miscellaneous Taxes & Licenses
  • Donations

Outside Services

500s = Outside Services, such as:

Rentals and Leases

600s = Rentals & Leases, such as:

  • Office Rent
  • Equipment Rent

Utilities

700s = Utilities, such as:

  • Electricity
  • Natural Gas
  • Propane

Depreciation and Amortization

800s = Depreciation & Amortization

Non Operating Income and Expense

900s = Non- Operating Income & Expense, such as:

So for example, a homebuilder may have the following accounts:

6 120 24 11- Construction Overhead; Non-Exempt Salaries; Subdivision 24; State 11

7 120 24 11- Marketing; Non-Exempt Salaries; Subdivision 24; State 11


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chart of accounts for sg&a expenses

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chart of accounts for sg&a expenses

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Chart of Accounts (COA)

See also:
Problems in Chart of Account Design
Complex COA Number for SGA Expenses
Example Chart of Accounts for Selling General and Administrative
Account Reconciliation
Account Reconcilement Definition

Chart of Accounts Defined

The chart of accounts (COA) is a listing of the general ledger accounts used by an organization to record transactions. For example, the accounts may be labeled in a numeric, alpha or alpha-numeric manner depending on the preference of management and the limitations of the accounting software. Today accounting software can accommodate most formats. In addition, list the accounts in the order that they appear on the financial statements; balance sheet accounts first, then income statement accounts.

The requirements of a company’s standard chart of accounts are one of the most important factors in software selection decision process. Define the requirements of the general ledger chart of accounts during the “Needs Analysis Phase (NAP)” of system selection and design. Therefore, involve the NAP every member of the management team that will be relying on financial data to help them manage their area of responsibility. The chart of accounts format and the selection of accounts provide sufficient data to manage the business. But it must meet all of the requirements of appropriate regulatory agencies. In addition, it must avoid minutia. A basic accounting chart of accounts system will provide for efficient expansion/modification of the management information systems as managers’ needs change based on changes in the business environment.

Chart of Accounts Design

The driving force in the chart of accounts design should be management’s information requirements, and not for example, the IRS Form 1120. An example of factors to be considered when determining the chart of accounts design include the present or future need for:

• Departmental data
• Project data (Expense & Production/Billable Projects)
• Regional data
Product line data
Customer data
Internal Revenue Service (i.e. details of travel & entertainment expenses, expenses eligible for research tax credits, and non-deductible expenses)
• Local taxing authority requirements, i.e.. location of property & equipment by taxing jurisdiction
• Primary profit drivers
• Measure strategic goals
• Other significant factors identified by management

Not all factors identified, will survive the final decision of the required composition of the financial data base. The factors identified which survive the cut, will determine the required number of fields and size of the account number, thus eliminating software that does not provide the required flexibility. The overriding goal is to keep the chart of accounts format simple, logical, and scalable.

General Ledger Chart of Accounts Numbering System

Once you have identified the chart of accounts structure, certain classes are generally followed to develop the specific account codes, as shown in the following sample chart of accounts below. Furthermore, the numbering of the accounts should incorporate some logic in order to make it easier for non-accountants to code transactions. For example, group the accounts by category (i.e.; overhead) then listed in alphabetical order.

1NNNNN..NN – Assets Assets are generally numbered in order of liquidity of assets, i.e. 11NNN..NN as Cash, 12NNN… NN as Accounts Receivable, and so on.

However there may be exceptions, as some industries, such as public utilities reserve the 11NNN..NN sequence for the cost of Property, Plant and Equipment, as such assets dominate the balance sheet.

2NNNNN..NN – Liabilities

3NNNNN..NN – Owners/Shareholders Equities

4NNNNN..NN – Revenues

5NNNNN..NN – Cost of Goods Sold & Services

6NNNNN..NN – Selling, and General & Administrative Expenses

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chart of accounts

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chart of accounts

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Common Problems in Charts of Account

Accountants are often great at, well, accounting, but tend to get lost in the detail, preferring to count expenses down to the paper clip level instead of focusing on what truly matters for a company’s profitability. Nowhere is that more evident than in the chart of accounts they create. What are some common problems in charts of account? Let’s dive into it below

Common Problems in Charts of Account Design

Here’s a look at the common problems in charts of account and some recommendations for improvement:

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 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….”

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Common Problems in Charts of Account

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Common Problems in Charts of Account

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Chart of Accounts

An item often taken for granted and seldom reviewed is a company’s chart of accounts. Often a hodgepodge of random accounts created for one-off events, it can lead to confusion and erroneous reporting. It is a good idea to take a look at the chart of accounts model periodically and clean it up. As always, simplicity is desirable, though not always attainable.

Chart of Accounts Model

You might consider this model to use as a guideline for cleaning up or establishing your firm’s chart of accounts.

If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

chart of accounts model

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chart of accounts model

See also:

Standard Chart of Accounts
Problems in Chart of Accounts Design
Chart of Accounts Example for SG&A Expenses
Chart of Accounts (COA)

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