Tune-up Your Chart of Accounts for Peak Performance
Find out which promotions bring in the most sales and which expenses are out of line with a well designed Chart of Accounts
Itís the end of the year and you have just posted the last transaction for 2004 and are now ready to move on to taking care of business for the New Year. To your horror, you see many accounts with zero balances, and many other accounts with huge balances. Before you can hope to have a smooth accounting for the coming year, youíre going to have to give your Chart of Accounts a good tune-up.
Thereís no time like the end of the year to review your chart of accounts. As youíre going over your year-end Profit and Loss Report, take the time to determine the purpose of each of the accounts in the Chart of Accounts.
Are business decisions easily made based on how the numbers are categorized into accounts? Or are some balances simply lump sums that donít easily tell you anything useful for running your business?
The well designed Chart of Accounts reveals details
Can you tell which promotion brings in the most sales? Can you tell which expense is most out of line? These questions can be answered with a well designed Chart of Accounts.
If you are the primary bookkeeper or if you are the owner, either way, you are on the front line of your company transactions. That means you have your finger on the pulse of what the business is doing.
The following are some questions you can review to determine if the current Chart of Accounts is meeting business decision-making needs:
>> Income Accounts. Is there one large account for all sales? Could you learn more if sales were broken out by product or service line, geographic region, customer type, or department? Should promotions or discounts be booked in a separate account from regular sales?
Based on those answers, you may want to create more accounts that will answer these questions. You might also be able to solve these issues by setting up classes of accounts or sub-accounts.
>> Expense Accounts. Which accounts contain balances that seem to be over budget? Should there be additional accounts to further break down the spending trends in these areas?
Which accounts contain small, immaterial balances (that do not need to be separated for regulatory record keeping) that could be combined? Combining accounts with immaterial balances will save time all year long.
>> Other Issues. Are there income/expense accounts that arenít used at all? These accounts could be candidates for inactivation or deletion.
>> Asset and Liability Accounts. Many bookkeepers will leave the asset and liability accounts to the CPA. However, there are a few things you can double-check.
Do account names easily define what the account contains? Are accounts classified in the right category, short-term and long-term?
Are sub-accounts used when it makes sense? For example, a construction company that owns several trucks could put one in each sub-account under a main auto account. This will make it easier when each truck is sold.
>> Sub-accounts. Are sub-accounts used properly? If multiple accounts crowd the Chart of Accounts, then sub-accounts could be the right solution.
The early part of the New Year is the perfect time to give your Chart of Accounts a check-up. Revamping it now will make your job easier for the year to come.