When was the last time you took a good hard look at your chart of accounts (COA)? If your answer is months ago or perhaps never, it’s quite possible that you have a mess on your hands. That possibility significantly increases if you’re not reviewing financial statements on a monthly basis and/or have multiple people working in the accounting file with COA modification rights.
Let’s do some damage control and go over a couple common areas that can get particularly messy:
1.) Expenses listed on the income statement. Some less seasoned accountants or non-accountants seem to take this area a bit too literally. We don’t need to know every single item purchased by the business from merely looking at the P&L but rather the larger categories of which those expenses fall. For example, paper should not be its own general ledger account unless for some reason this is a material expense to your company and it must be segregated from other costs. Were that the case, it is likely that paper is actually a cost of goods sold. However, if you insist upon having that level of detail, which I discourage, by all means the acceptable method would be to create a sub-account of office supplies called “Paper”. This would allow for the desired level of detail but also have the option to view your financial statements in a collapsed view that would only show parent account balances (in this example, Office Supplies).
2.) Long-term liabilities listed on the balance sheet. For illustrative purposes, let’s assume you are a start-up funded mainly by individual investors who have entered into convertible note agreements with your company. In order for the list to not over grow your balance sheet, or in many cases it is a breach of confidentiality to list the individual contributors, you should create them as sub-accounts of a generic, convertible debt account.
By reviewing your chart of accounts routinely, you can ensure that the appropriate accounts are being used and avoid the drudgery of having to merge or delete accounts and reclassify a bunch of expenses due to poor COA management. For help with this challenge, call your TGG Accounting specialist.Written by: Andrea Murray TGG Accounting