The chart of accounts (COA) is a financial tool that provides a complete listing of every account in the general ledger, broken down into subcategories. It sorts, organises, and consolidates the different specific accounts, making things easier for tracking and logging.
However, many businesses struggle to keep well-managed COAs. That disorganisation can lead to inefficient or disrupted processes, making visibility challenging to achieve. Let’s take a look at some common mistakes in COA design and how best to fix those errors.
Excessive Account Creation
“More is better”. It’s easy to think that more is better, but that’s not necessarily the case when it comes to your chart of accounts.
Often, the person entering the data into an account is not a trained professional. This results in them often creating a new account when they are faced with an accounting entry that is not explicitly described by an existing general ledger account. However, the more entries and accounts you have, the more disorganised your system becomes.
Disorganised ledgers with many accounts created makes it hard to input data into the right accounts consistently without errors, facing a significant loss when the time comes to audit these ledgers.
Too many details isn’t a good thing, but too little is just as bad! If you consolidate too many of your codes, it can be hard to decipher between higher and lower cost items. Often times revenue consists of the one-line item labelled “Sales” and “Cost of Goods Sold” as another line item. On the other hand, there is considerable detail in “General and Administrative expenses”.
This makes it harder for your organisation to budget and make informed decisions. Most accountants manage profitability by controlling costs; however, you can create more value by managing your gross margin.
With sufficient details, it will be easier to reconcile accounts, even with two inventory ledgers. Furthermore, it will allow your company to make informed decisions.
Misaligned categories can cause confusion in your COA design. You have to align how your accounts are categorised to get accurate reports and insights on your organisation’s performance.
It’s not uncommon to see Revenue sorted by product or category and Cost of Goods Sold being tracked under a different segregation. However, you cannot sort one by product and another by department. It would be best if you sorted it by the same methodology for accurate analysis and reporting.
Inconsistent or Unclear Naming System
When titling accounts, your team should be consistent across the organisation. In some instances, it may be tempting to use acronyms, vague titles, or jargons, in titling accounts. However, you should keep in mind that people outside the financial team, such as stakeholders or the CEO, will be reviewing the COA and should be able to understand all titles.
An inconsistent or unclear naming system makes it difficult for a reader of the financial statements to decipher the accounts.
Incorrect Numbering System
Don’t get mixed up between naming and numbering system. A naming system is the title of an account while a numbering system is the account’s identification code.
Account numbers, especially in General and Administrative expenses, are not assigned in any logical order. Financial controllers coming from enterprise corporations may tend toward six or more digits systems. However, as an SME this is unnecessary as too many numbers can lead to a complicated and cumbersome COA.
To accommodate future growth, be sure to leave opportunities in your numbering system. This allows you to add in accounts later while maintaining alphabetic order. When accounts are not entered alphabetically or within a logical grouping, it is difficult for the clerical staff to code payables properly and consistently.
How can DashBod help?
DashBod is a cloud-based Accounting and HR solution, which automates the matching of entries in the bank statements to the invoice/ entries in your account. It ensures that your COA provides sufficient details and is aligned to your organisation’s naming and filing system.
Furthermore, it provides financial reports for you to understand your company’s financial health via reports such as Profit & Loss, Balance Sheet and a General Ledger. DashBod being an Accounting and HR cloud-based software automates the titling of your accounts, preventing a disorganised COA from happening.
What are you waiting for? Streamline and organise your chart of accounts with us!