How to Reboot Your Chart of Accounts Structure

 

Financial reports frequently fail to meet the expectations of CEOs. How to Reboot Your Chart of Accounts Structure Instead of asking readers of the financial statements what they want to see, accounting teams frequently concentrate on doing things “the correct way.” In this post, Toptal Finance Expert Scott Hoover discusses a frequently disregarded approach to handling this predicament: the chart of accounts. The best and most efficient way to advance financial reporting for an organisation is frequently to have a well-structured chart of accounts.

What Is a Chart of Accounts and Why Is It Important?( How to Reboot Your Chart of Accounts Structure)

I recently assisted a technology business owner in enhancing his financial reporting. I instructed him, “Open your chart of accounts.”

He admitted to me as we reviewed his accounts, “I don’t think I’ve ever looked at that.” As I demonstrated to him how his sales invoice lines were all set up to go to a single sales account in his chart of accounts, I could see the lightbulbs start to turn on. His financials were unable to convey information about his five different revenue streams due to the account structure’s simplicity.

The framework of shelves and storage bins in a warehouse is analogous to the chart of accounts. Consider a business that sells computer hardware and constantly receives desktops, laptops, and printers. An incoming shipment of Dell laptops will be directed to a specific bin in the Dell sector of the warehouse’s laptop area if it is sorted appropriately. In this manner, the warehouse staff will be able to quickly and conveniently fetch a Dell laptop when a customer orders one.

Seven Steps to Building the Perfect Chart of Accounts:( How to Reboot Your Chart of Accounts Structure)

·       Fire GAAP and tax.

   A small business’s accounting is configured to accommodate their tax accountant. GAAP-based financials required when the business expands for banks. Investors, and organisations like bonding companies. GAAP-based financials are frequently the culmination of the process.

 

There is, however, another level. Creating financial reports with the data you need to view is done at the managerial accounting level. Make a total break from your reports because tax and audit CPAs will already be modifying them to suit their needs. The new objective is to produce financial reports that give you the measurements you require to manage your business all year long.

·       Define gross margin.

After direct costs from sales deducted, the profit known as the gross margin. What do “direct costs” refer to? The important query is that. Direct labour and direct materials acknowledged to be direct costs. The definition is optional beyond that.

Focused environments to prevent it from affected by changes in sales.

·       Give careful thought to indirect costs.

Indirect costs are overhead costs that related to sales but cannot linked to a particular product or task. Paying factory supervisors, incidental supplies like tape, glue, and screws, fixing machinery, and shop building insurance are a few examples. Indirect costs would used to classify things like tax preparation fees. Marketing, and legal expenses.

The majority of businesses pick an indicator like labour hours and calculate an hourly rate that “uses up” these indirect costs over the course of a month or year. Consider a simple manufacturer, for instance, who had $2,000 in indirect expenses last month due to $1,000 in production supplies and $1,000 in shop maintenance. 200 hours were put in by production workers in the month.

·       Organize operating expenses to reflect owner preferences and match budgeting level of detail.

The information can cut in a variety of ways. For instance, the cost for lunches might be allocated between separate accounts or the areas that the dinners are related to, like marketing, conferences, or travel.

 

It is crucial to ascertain the management team’s policy on how to handle costs such lunches and technological subscription.

·       Use account numbers, if you aren’t already.

Similar to bin numbers in a warehouse, account numbers. Base account numbers of five digits work well (four for a very simple setup).

·       Consider separate accounts for key month-end entries.

Large non-cash journal entries improve the accuracy of month-end financial reports. For instance, if wages earned between October 18 and October 31 paid. On November 7, a journal entry must made to transfer that cash expense from November 7 to October 31 to reflect October’s financials.

·       Maximize the functionality of your accounting software.

One benefit of having a strong chart of accounts is that it can extend the lifespan of even the most basic accounting programmes.