What is the Standard Chart of Accounts?

A successful company who wishes to ensure accurate accounting records starts with a standard chart of accounts as their means to record business transactions and activities.

A standard chart of accounts is the listing of identified accounts that make up a company’s general ledger.

The purpose of this article is to understand what the standard chart of accounts is and to provide some information regarding its use in business.

Purpose of the standard chart of accounts

The standard chart of accounts is the main driver in a company’s ability to accurately record and categorize transactions. The more clearly and deliberately the chart of accounts is created, the greater benefit the company will receive in their budgeting and analysis of financial performance.

Once you have established a well organized chart of accounts with a level of detail appropriate for the industry and company size, you can use the information to determine company strategy, growth related goals, and have a better picture of business’ performance over time.

What role does the chart of accounts play?

The chart of accounts serves as the system by which a company can group like transactions into accounts for more meaningful financial reporting and decision making.

The chart of accounts is organized generally by a numerical system, so that each category of account can be easily identified, grouped and referenced by a number. The accounts are primarily broken down into the following categories:

• Assets
• Liabilities
• Equity
• Revenues
• Expenses

Each of these broad categories are then further broken down into subcategories.  Using revenue as an example, common subcategories may include operating revenue and non-operating revenue.

Can the chart of accounts be changed?

The chart of accounts can be easily updated as the company expands or takes on new product lines or business activities. As a result, some companies will build in other department or company specific codes that allow for better analysis and understanding of the company’s financial position or earnings.

Example Categories in the Chart of Accounts:

1000 Assets

2000 Liabilities

3000 Inventories

4000 Revenues

5000 Expenses

Example Subcategories Within the Asset Grouping:

1100 Cash

1200 Petty cash

1300 Investments

1400 Inventory

1500 Prepaids and other current assets

1600 Property plant and equipment

1700 Accumulated depreciation

1800 Other non-current assets

How does a Chart of Accounts differ from a General Ledger?

The chart of accounts gives the basis for the transactions which flow out to the general ledger. The general ledger is the record of all transactions posted in a business.  Each transaction utilizes the chart of accounts to properly categorize the transactions.

How many accounts do I need in a chart of accounts?

Depending on the size of the company the chart of accounts will vary.  For example, small companies may only need 20-30 accounts to accomplish their reporting goals. Other companies, especially large publicly traded ones, can have thousands of accounts in active use. One other item of consideration is that it can be helpful to leave some gaps within the numerical convention used in order to allow room for growth. For example, if our cash account for the main general checking is 1100 and we end up developing a cash account for our two revenue stream deposits, we can label subsequent cash accounts with the following numerical convention: 1101 and 1102 if given room to do so.

What are common chart of account related issues

• Lack of sufficient information produced for regulatory or tax needs
• Lack of flexibility for more technical transactions, such as mergers or acquisitions
• Limited scalability for changing business models or operations
• Poor training on its use and management of changes
• Varying chart of accounts across business departments impacting overall reporting outcomes

Important Considerations in Developing a Standard Chart of Accounts

• Volume of accounts- should be appropriate for size of the company and financial reporting needs
• Numerical assignments based on category- numbers assigned to accounts should be consistent in format and progression
• Naming conventions use- should be concise and clear for ease of use
• Adequate training for personnel- as the chart of accounts is developed, personnel interacting with it on a go forward basis should be involved and receive adequate training on the uses for accounts during normal operations.

Common Mistakes in Chart of Account Development

Too much detail within expense categories

Especially for small companies with a lower volume and range of activities, it is important to not drown your expense accounts with too much detail. This can cause inefficiencies in tracking of expenses and make month end reporting more stressful and time consuming.

Lack of detail for revenue and cost of goods sold categories

A place where more detail can assist in cost management for greater value with the revenue and cost of goods sold categories. Often it is helpful for each sales line to have a unique account identified and an associated cost of goods sold account.

Inappropriate numerical assignments

A chart of accounts with no logic or purpose behind the numerical assignments can make it difficult to code transactions accurately and efficiently.

Lack of quality titles for accounts

Abbreviations or broad naming conventions for the chart of accounts can cause confusion for users of the chart of accounts and for analysis to be compiled accurately.

Important considerations in maintaining a standard chart of accounts

• Deleting old accounts- old accounts no longer in use can be deleted if confident no longer needed
• Accounting system advantages- most accounting systems have a chart of accounts in place that you can customize for your business needs

Is There Any Required Structure for the Chart of Accounts?

There is currently no required structure for the chart of accounts, however, depending on company industry there are sometimes required naming or numerical assignments for regulatory reporting.

As an example, the United States Department of Agriculture, Rural Utilities Service, has published a uniform system of accounts for electric borrowers and was made effective back in 2008. For the “Electric Plant in Service” Account to comply with these regulations, it must be named as noted and be assigned the number 101.

Use of technology in the chart of accounts

Most chart of account changes or redesigns are driven by an enterprise resource planning system upgrade or conversion. Lots of these systems generate and automate chart of accounts and although it is important to build the chart of accounts with the system in mind, it is also important to first consider information and dimension requirements. For example, before generating a new chart of accounts with the change in your enterprise resource planning system, a company should review required information and reporting requirements. In addition, there should be an overview of requirements by either department or legal entity as applicable.

As mentioned previously, the chart of accounts can be developed through your enterprise resource planning system or generated manually, but regardless of which route you choose there are many factors to consider in its development and ongoing management. A lot of the value derived from the chart of accounts starts within the company and incorporates applicable personnel for training and discussion. The chart of accounts can be impactful in business reporting and should not be overlooked.

In addition, the chart of accounts can be adjusted over time to better capture business operations or reporting needs and should be accurately maintained and reviewed. Perhaps as a best practice the chart of accounts could be reviewed annually or biannually depending on volume of changes made over time. As the company evolves so should the chart of accounts, within reason to still support ease of use and applicable reporting capabilities. All reliable financial information begins with a well-developed and executed chart of accounts, created with the business needs and operations in mind. It’s important to take the time to develop a quality chart of accounts and then once you have successfully developed the chart of accounts for your business, you can easily see where things are headed and move forward with that peace of mind and focus on the matters at hand!