A company of any size can benefit from putting a certain amount of forethought into the set up and design of its Chart of Accounts (COA). This is essentially a company’s system of categorizing and classifying transactions in the general ledger. A best practices COA should use standard accounting principles, incorporate items that are specific to your business, and allow for flexibility as your business grows and changes. Perhaps most importantly, your COA should be set up for clearly defined outputs that will allow you to report your finances and business metrics to executive management, investors, lenders and regulatory agencies without the need for complicated, time-consuming manipulation of data.

Establish a Scalable Chart of Accounts Hierarchy

The COA should follow a logical hierarchy that has a numbering system which allows for scalability. At the highest level the account numbers should be defined by account type:

Balance Sheet Accounts

10000       Assets Accounts

20000       Liability Accounts

30000       Ownership/Stockholders Equity

Income Statement Accounts

40000       Revenue Accounts

50000       Cost of Revenue (COR) Accounts

60000       Operating Expense Accounts

This numbering system will allow for various levels of subgroups as needed.  Subgroups and subaccounts are useful to provide a reasonable level of granularity, but should be meaningful and not contain more detail than is necessary for reporting needs. There are numerous examples of typical accounts found in charts of accounts, which vary by company size. For example, Revenue and Cost of Revenue (COR) subaccounts might map to different product lines or business segments within the company. This will be useful for tracking the profitability of each revenue source, and for the comparison of each revenue source versus the forecasted expectations for that revenue source.

40000  Revenue

41000  SaaS License Revenue

42000  Customer Service Revenue

43000  Maintenance Revenue

50000  COR

51000  SaaS License COR

52000  Customer Service COR

53000  Maintenance COR

In setting up an expense account hierarchy, it is best to follow the breakdown of the most commonly used ‘element’ groups to get a clearer picture of where your costs lie. A logical, standard set of parent expense accounts would look as follows:

60000  Operating Expenses

61000   Compensation Expenses

62000   Non Compensation Expenses

62100 General Admin

62200 Marketing

62300 Travel and Entertainment

62400 Professional Fees

62500 Facilities

62600 Technology

62700 Product Expenses

And the lowest level subaccounts can be easily inserted within these groups:

62300 Travel and Entertainment

62310 Airfare

62320 Meals

62330 Travel Other

Things to Remember When Naming Subaccounts

As you create the account and subaccount names, it is important not to repeat names (e.g., do not have an ‘Other’ account in the Marketing group and an ‘Other’ account in the Technology group – it is better to have one called ‘Marketing Other’ and one called ‘Technology Other’).

Also, account numbers that begin with a zero or account names or numbers that use non-alphanumeric characters should be avoided. These conventions will make for better and easier reporting functionality when exporting data out of your GL software.

Further Organize with Classes

Lastly, one more level of dimension that is provided for in most GL software packages are classes. Classes can be used to separate data among business departments rather than duplicating major income or expense account sets, and will allow for a matrix view of your data. The class is a way to tag each revenue or expense item using a set of labels that you create. For example, assume you have three departments (Development, Sales, and Operations) within your organization and each department head is responsible for his or her own budget. By tagging each expense to a department code or ‘class’ you can create the granularity needed for each department to view its expenses versus its budget. So the matrix report related to airfare might look like this:

chart of accounts example of classes

All of these guidelines are helpful, but what is most important is that you know your business best. The more thought you put in to what you want to get out of your COA data, the better job you will do getting it set up in the first place and the more time and energy you will save in the long run.

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