September 16, 2022 | 4 min read
How to Structure Your Chart of Accounts
As our black belt experts are working through audits, we thought it would be a great time to revisit concepts around structuring your Chart of Accounts. Having a thoughtfully organized – and well kept – chart of accounts is key to any successful audit process. But how to make this as easy as possible?
First, let’s refresh on the basics. Your chart of accounts is a tool which lists every account in your general ledger. When used effectively, this can reduce clutter, headaches, and even prevent misplacing documents. Keeping your CoA organized is well worth the effort. That’s why today we are bringing you 5 tips on how to best build your CoA so you will be properly prepared for next year’s audit.
1. Group By Type
Don’t get too creatieve here. Save that for the fundraising. Keep things simple, and categorized with like items. There are 5 main types of accounts you would likely have: assets, liabilities, equity, revenue, and expenses. Start with your Assets and continue down the list.
2. Assign Your CoA Numbers
It is best practice to use 4 digits for account numbers. This allows you to add all your accounts under these groups and still have more than enough room to expand and continue adding accounts. You can start each subgroup with their own number, i.e. 1XXX Assets, 2XXX Liabilities, 3XXX Equity, 4XXX Revenue, 5XXX Expenses.
3. Don't Get Lost in the Details
All right, to be fair we strongly believe details matter. But there’s a time and a place for being overly meticulous. Top-line accounts can get broken down so granularly – endless sub accounts – you might have a hard time seeing through the line items. There does not need to be an account for individual items. For example, don’t have an account for pens, another for pencils, and yet another for paper. These can all fall into the office supplies account.
Simple.
Broadly speaking, once you have main categories, these can further be broken down into subgroups for organization. Such as Administrative Expenses being 51XX, etc.
4. Leave Room for More Subgroups
When you are numbering the subgroups leave space for new groups as they appear. For example, the accounts in your assets group could be 1010 for Checking, 1020 for Investments, 1030 for Savings and so on. This way when new accounts are created you do not have to recreate the entire chart.
5. Stay Up To Date With Your Chart
Doesn’t life feel like it distills into just being on top of your stuff?
This work is no different. You can have the most organized and detailed CoA, but if transactions are not being recorded as well as old accounts being deleted, then it serves little purpose. The more you use it, the more value you will get from it.
We hope this is a good starting point to creating or refining your chart of accounts. If you would like some more tips be sure to check out our post on preparing for your next audit. Again, the earlier these practices are adopted the more benefit they will provide.
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