How to Design a Scalable Chart of Accounts
One of the first tasks when implementing a new accounting software is designing a new chart of accounts (COA). Some of you accounting professionals out there might see this as a great and exciting opportunity to revamp that messy, outdated and unstructured COA you are stuck with. However, to others, this could be a daunting task and you might not know where to begin.
Regardless of which category you fall into, designing a COA is no small task. It requires a certain amount of forethought and a lot of effort to design and engineer a scalable COA.
In this blog, I hope to give you some tips and advice that will help you get started.
1. Best Practices
A best practices COA should use standard accounting principles and incorporate items specific to your business.
The order of your accounts should align with your financial statements. It should order by account type and then liquidity. Although the COAs will differ between businesses, the basic setup should be the same. The chart of accounts numbering best practices are:
- Cost of Goods Sold
- Operating Expenses
- Other Income and Expenses
2. Start by making a requirement list and then develop a blueprint.
Designing a well-structured COA is very much like building a house and no contractor will build a house without a blueprint.
To design your COA first, you need to know what the criteria in building your “house” are. You can start by understanding your reporting requirements, business metrics, and KPI’s, as well as any financial reports you wish you had. You should also solicit input from executive management and stakeholders.
Once you have compiled a list of current and new requirements, you now have the big concepts for your COA blueprint. The COA sets the framework of your financial system and it should be clearly defined. Its job is to organize your financial data in meaningful categories so you can generate metrics and provide actionable information from your accounting system easily without any time-consuming data manipulation.
With this goal in mind and the big concepts derived from your requirements, you can start developing a COA blueprint using the basic setup mentioned above and a few more tips below.
Start by outlining the overall structure and work your way down to the account detail. The basic setup gives you the financial categories for your balance sheet and income statement. You can further build out the account hierarchy by adding the sub-groups and sub-accounts under each category. The sub-accounts should provide a reasonable level of granularity that is useful and meaningful for reporting. Keep it simple.
3. Use of Account Segments or Dimensions and Statistical Accounts to Satisfy the Reporting Needs.
Most accounting systems provide you with the ability to setup one or more account segments or dimensions. This gives you another level of classification, making your COA more dynamic and robust.
Define the account segments wisely and use them to satisfy your reporting needs, but be careful not to overcomplicate your COA or it will become hard to use. Most common account segment definitions are natural, entity, region, profit center, cost center, department, and product.
Most financial reporting tools give you the option to slice and dice your data by account segment and any combinations of it. Some accounting systems, such as Microsoft Dynamics GP, let you setup unit accounts to track statistical data. These can be used for KPI’s and business metrics reporting.
4. Scalability and Flexibility Are Key.
You probably don’t want to revamp your COA every two years. Therefore, designing a flexible and scalable COA to allow for business growth and change is key. This requires some forethought but it is not difficult. For example, adding an extra digit in your account string might do the trick.
5. Logical Account Numbering.
Using numerical value instead of alpha-numeric for your COA is the best choice. Doing so allows your GL accounts to sort better and will make data entry easier and quicker. Try to avoid using leading zero as it could be problematic when exporting your COA to Excel.
Build in some logic in your numbering scheme but keep it simple. For example, asset accounts start with 1, liabilities accounts start with 2, equity accounts start with 3... etc. Put your sub-groups and sub-accounts in logical ranges as well. For example, all your current assets are in 1000 to 1499 range and you further break out your cash and cash equivalent accounts in 1000 to 1049 range, short term investment accounts in 1050 to 1099, and accounts receivables in 1100 to 1149…etc. Make sure to leave enough room in each range for future growth and changes.
The logic behind the numbering scheme should be clearly defined in your COA blueprint for reference. Again, keep it simple and easy to understand.
6. Standardization is also key
Standardized account numbering logic and account description is essential to keep your COA clean and consistent. Avoid using vague account description. Most importantly, each GL account should be defined in order to help the accounting team code the transactions correctly and consistently. This is especially important if you have multiple sites. Assign a COA owner to keep the chart up to date with changes in business model and regulatory requirements.
Get the Most Out of Your Accounting System
It is crucial to start a new accounting system implementation with a well thought-out COA. Although it does take time and effort to produce, the end result is more accurate and timely financial reporting. A well-designed COA will provide business stakeholders actionable information in a timely manner to make important business decisions. The more time you spend in designing the COA, the more efficient you will be in the long run.
If you need help or have any questions, we’d be happy to help! Simply contact FMT using the form below and we’ll be in touch shortly.
What is a chart of accounts structure?
A chart of accounts structure is a system of organizing financial transactions into distinct categories, also known as accounts. These categories can include assets, liabilities, income, and expenses. It is used to facilitate the generation of financial statements and reports for a business.
Why is a scalable chart of accounts important for a business?
A scalable chart of accounts is important for a business because it allows the business to adapt to changing needs and growth. As a business expands and evolves, its financial needs also change. A scalable chart of accounts allows for the easy addition and removal of accounts, making it simpler to accurately track financial information and make informed business decisions.
How can I design a chart of accounts that can adapt to the changing needs of my business?
Designing a chart of accounts that can adapt to the changing needs of a business can be done by keeping the structure simple, using a consistent numbering system, and regularly reviewing and updating the accounts. It is also important to involve all relevant departments and stakeholders in the design process to ensure that all necessary accounts are included.
Can you give an example of a scalable chart of accounts structure?
An example of a scalable chart of accounts structure is one that uses a three-segment numbering system, where the first segment represents the account type, the second segment represents the account category, and the third segment represents the account number. This allows for easy expansion and organization of accounts.
How often should I review and update my chart of accounts structure?
It is recommended to review and update your chart of accounts structure at least once a year or whenever there are significant changes in your business operations. This will ensure that your chart of accounts remains accurate and relevant, and that you can continue to make informed business decisions.