A chart of accounts (COA) is a financial organizational tool that provides a complete listing of every account within an accounting system. If you are currently using QuickBooks Online (QBO), you will recall that it establishes a chart of accounts as you add new accounts. However, this default COA is simply an alphabetical chart of accounts lacking any meaningful detail that could be used for job costing/cost accounting. While QBO can easily establish categories within the COA, there is no correlation with the alphabetical list to how you operate and run your business.
In our previous post, we discussed the importance of having a 5-digit numbering system for your COA. Having this numbered system is critical because it gives you grouping information that you’ll use for your business intelligence. For example, if you’ve grouped all your current assets and liabilities with a numbering system, you can instantly produce your net liabilities. It also allows you to maintain an appropriate profit margin whereby you can easily calculate your job costing, even if you sell more in one month than another. Say you recorded a sale in your accounts receivable in June, you would want the cost associated with that sale to also be within June. Without an evolved COA, you won’t have the tools to connect the costs to the sale.
Another benefit of the 5-digit numerical COA is that adding new accounts is simplified, and easy to manage from a reporting perspective. Without the numbered accounts, you may not be able to truly tell what’s happening within a category of accounts. We also recommend that if you have a miscellaneous category within your groupings, and it becomes more than 10% of the group, then it needs to be brought out to create a new account.
Your COA doesn’t have to be perfect, and the beauty of it is, you can make modifications as your company grows or your business intelligence needs change. Don’t let recoding your COA be overwhelming. vbo Solutions has a proprietary template we provide for our clients, making it easy for our clients of all industries to adopt. We also provide tools to allow you to reclassify accounts. While that process seems daunting, it really can be worthwhile it to recode transactions to produce better information.
Having a well-designed COA is best practice for every company: Fortune 500 companies, as well as solo to medium sized businesses. It provides meaningful information to make timely management decisions, essential for growing companies.