Having an organized chart of accounts is so important to help your business to put the correct expenses into the correct buckets. You do not want to misclassify transactions. Also, your business does not want to have unnecessary accounts in the business chart of accounts because the business doesn’t want to place similar transactions that may be classified into different accounts. Flat Top Bookkeeping has experienced this. One of our clients wanted us to include extra accounts in their chart of accounts because they might have a transaction that would require these accounts later down the road. We simply explained to the client that adding those accounts when the transaction occurs is easier than to undue placing of the wrong transactions into these extra accounts. We will explain in this blog why having a solid/organized chart of accounts is important.
Classification is important, especially if you are in an audit. Having an organized chart of accounts will help your business classify each transaction correctly. The reason classification is so important is because classifying will allow the business to know where and when their cash is going. This will allow one to increase or decrease certain transactions.
Short accounting numbers
Having short account numbers will help the business know which number belongs to which account. The recommended length for an account number is four numbers or less. I have seen a business with a long account number and it is difficult to remember which account belongs to which account number. Having a short account number will help your business to have an organized chart of accounts.
A business must organize its accounts in numerical sequence that will help its business chart of accounts. The following sequence is an example. 1000 is for assets and 2000 is for liabilities. The business should organize its accounts as it would like them to appear on the balance sheet or income statement. Below is a great example of placing accounts in a good sequence.
2xxx Liabilities & Equity
4xxx Cost of Sales – Purchase
5xxx Operating Cost – Labor
6xxx Operating Cost – Benefits
7xxx Operating Cost – Others
8xxx Administrating Cost
9xxx Non-Operating Cost
Assigning each department, a department code (Cost Center) allows your chart of accounts to split out each department’s expenses. If your business has multiple departments, you will need to implement department codes to separate each expense. Department codes are only used for the expense accounts. These department codes come in handy when a business creates a budget to understand which department is spending the most or which department is following the budget.
The items we discussed above are examples of ways to enhance a business chart of accounts. There are many more items we could list above to help your business to organize a chart of accounts. If your business doesn’t have the background in accounting, we would recommend your business find an accountant to set up the chart of accounts. By finding an accountant/bookkeeping to help set up your chart of accounts you will save time and money. Flat Top Bookkeeping strives to help businesses in good accounting practice. One of the most important aspects of good accounting practice is having a good chart of accounts. If your business needs advice setting up your chart of accounts, Flat Top Bookkeeping has many years of experience working in this area.