Executives want financial reports with substance. However, most reports fall short of their expectations. When providing reports, most accountants follow their checklist of things to report on. This is fine if the destination of reports is used to check a task off the list. If you want to have your reports used, referenced, and appreciated, I suggest you ask your executives to help you understand what they want to see in a report.
Most accountants only provide what is easy to pull from their structure chart of accounts, and most charts of accounts are structured ineffectively.
A quick overview of Chart of Accounts
Chart of accounts is the foundation of every report. For this reason, a solidly structured chart of accounts is vital for high-quality reporting.
Think of your chart of accounts like a filing cabinet. Each drawer represents an account. Each file is an accounting transaction. The better organized and structured your filing cabinet is, the more granular your reports can be.
Quick steps to a better chart of accounts organization
- Build to management goals – By thinking about managerial accounting, you will provide the needed reports for GAAP and tax reports and provide in-depth reporting for your client’s management team.
- Get more granular – Separate your accounts into parent/child accounts to enable you to collect specific data and provide powerful insight into the different areas of the business.
- Use account numbers – The numbering system requires some thought, as it will impact how your accounting data is recorded, stored, and retrieved. Ensure you provide enough spacing between numbers to allow for growth.
- Key month entry separation – Make it easy to see month-end financial reports with large non-cash journal entries by funneling them to separate accounts.
- Use customizable, flexible report software – When you take time structuring your chart of accounts, you can finally create reports that genuinely matter to your clients. These reports can be automated in minutes when using reporting software.
Management wants answers to questions.
- What are the numbers that make up our cost of goods?
- Show me a cost breakdown of our subscriptions?
- Where did most of our expenses come from last month’s tradeshow?
- We went over budget on travel. Why?
- Can you provide a break-out summary of each department?
Accountants dreaded questions that start with the words “Can you provide…” or “It would be nice to see…” What goes through most minds is how I am going to be able to provide that quickly.
Most accountants sweat bullets when questions like those are asked because the structure of the chart of accounts makes it difficult to find and use the data needed to answer the question.
Structuring your chart of accounts to get granular is the single best thing you can do for your reporting process. Don’t worry; this won’t take lots of time or energy. Best of all, once you lay it out, you can duplicate your efforts throughout all your clients.
Most client’s chart of accounts is oversimplified making it challenging to get down to brass tacks.
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Let’s get granular
Going back to the example of the filing cabinet. Most clients have several drawers but past that, no structure exists. This makes it difficult for accountants to provide detailed reporting and uncover insights about anything in their client’s business.
Take, for example, the Cost of Goods Sold. Most clients have a drawer labeled ‘Cost of Goods Sold,’ and any cost associated with producing their product is thrown into that drawer. How can you provide insight into the increase or decrease of raw material cost, labeling, printing, or labor?
Reports that pull from a simplistic chart of accounts show an increase in the cost of goods sold but can not pinpoint the culprit that caused the increase.
By simply organizing your chart of accounts in such a granular way, you can quickly provide any report or metric to your client in a way you have never been able to before. Your financial statements will provide more detail and insight for your clients’ allowing them to make more strategic business decisions.
Many financial professionals are weak in setting up a chart of accounts to improve their advisory offering. For most, this is a new process. Most chart of accounts is set up to improve building the required reports for taxes and GAAP. Now that accounting firms are looking to enter the advisory space, the chart of accounts needs to go into more depth.
Before you start your restructuring of a chart of accounts. Get to know your client’s management and what they are looking for in a report. This not only helps them get what they want, but it will help you structure the chart of accounts so you can quickly give them what they are looking for and anticipate any other questions they might ask in the future.
If you want to differentiate your deliverables from your competition, you can no longer afford to use the pre-fabricated chart of accounts automated by accounting software. If you’re going to provide something valuable to your client, you must break out of the restrictions placed on your reports.
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Structuring the chart of accounts.
Three basic rules to follow when setting up your chart of accounts.
- Number of “drawers,” or accounts
- What files go into each drawer
- How each drawer and file is organized.
Here are some helpful ideas to help you structure your chart of accounts to ensure you can get the most from them and provide your clients with the reports they need and want.
Think Managerial Accounting, not GAAP or Tax accounting
Your chart of accounts is structured in such a way that makes it easy to pull data for GAAP and tax reports. These reports usually have no need to go to the root of an account.
But if you think managerial accounting, you will be able to provide the needed reports for GAAP and tax reports while providing in-depth reporting for your client’s management team.
The goal here is to provide reports that help your clients run their business year-round by offering management-oriented financials without making it difficult for you to give these custom reports.
This will only work if you have custom reporting capabilities to easily convert your newly structured management-oriented chart of accounts into powerful reports.
Give careful thought to category structures.
This is where the rubber hits the road and truly needs an understanding of your client’s business and goals. The chart of accounts should be thoughtfully organized to ensure items do not overlap or provide faulty insight.
This can be one of the most confusing things when structuring your chart of accounts. But if the approach is not well thought out, then your report creation will be complicated.
Deciding the organization for your drawers and which files go into which drawers is vital if you want to create excellent reports. There is no one right way to organize the data, and it is usually dependent on what your clients want in their reports.
It is essential to discover how your client’s management team treats their expenses. Do they want to see them by themselves or as they relate to the category they are associated with?
However you slice it, you must ensure it aligns with your clients’ needs.
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Use account numbers
I am sure you already know this. Use account numbers.
The following is industry best practices:
40000: Operating Revenue
50000: Operating Expense
60000: Overhead Cost & Expense
70000: Non-Operating Revenue & Gains
80000: Non-Operating Expense & Loss
When making number assignments, make sure you provide a big enough gap between numbers to allow growth. To get even more granular, create a parent, child structure.
When providing a Financial Statement, business owners want information in a summation rather than five details lines. However, in a management report for analysis, the opposite is true. The parent-child structure allows you to have the best of both worlds. Displaying the parent in a statement but showing the child level for reports you provide for analysis.
Here is a sample of the parent-child structure:
- 21000 Accounts Payable
- 21100 Accounts Payable – Trade
- 21200 Other Payables
- 22000 Payroll Taxes Payable
- 22100 Withholding and FICA Taxes
- 22200 Federal Unemployment Taxes
- 22300 State Unemployment Taxes
- 23000 Sales Taxes Payable
- 23100 Sales Tax
- 24000 Accrued Expenses
- 24100 Salaries and Wages
- 24200 Vacation and Sick Leave
- 24300 Rent
- 24400 Percentage Rate
- 24500 Interest
- 24600 Real Estate Taxes
- 24700 Personal Property Tax
- 24800 Utilities
- 24900 Other Accrued Liabilities
Never go more than 2 or 3 levels deep on child accounts and make sure numbers correlate with other category account numbers.
This type of simple organization will differentiate your firm from the rest. Most firms are not interested in doing that little extra to put a shine to their reports. Building this type of organization into the chart of accounts will help you ensure that crucial information will always be front of mind for the management team, and your firm value will increase.
p, Reach. InstSeparate accounts for key month-end entries
This goes back to category structuring and numbering. Due to certain situations end of month financial reports are made accurate with non-cash journal entries.
A typical chart of accounts structure makes it difficult to see how much wage expenses are earned when the end of the month earned wages are paid at the beginning of the following month, and the journal entry is mixed in with regular wage expense accounts. There are also struggles with work-in-progress values or under/overbilling that extend over multiple months. I am sure you can think of a few other examples that are a nightmare for you.
In these cases, it would be helpful to break these journal entries into separate child accounts under the parent account. For example, under 40000 Direct/indirect costs, you would have a parent account of 46000 Direct Labor. Under this parent, you would have 3 child accounts 46100 Production labor, 45200 Change in Accrued Labor, and 46300 Change in Work in Progress Labor. This attention to specifics will help give a broader understanding of the end-of-month reports. Giving the executive team a more granular experience of their Direct Cost. Alerting them to specific problems or possible business strategies.
Connecting a well-organized chart of accounts to Reach Reporting.
The chart of accounts always provides a solid foundation for powerful reports. When you take time to structure your chart of accounts, you can finally create reports that genuinely matter to your clients. These reports can be automated in minutes when using reporting software.
Most reporting software however, does not allow you to work with your chart of accounts. Instead it rapidly spits out a boilerplate report and restricts your ability to provide a managerial report that enhances your clients financial statements. This restriction means your clients will get the same confusing impersonal reports from any of your competitors. Which means in the mind of your client’s accountants are a dime a dozen.
By effectively structuring your chart of accounts and utilizing Reach Reporting, the most flexible reporting tool, you can position yourself as a leader in the industry. Placing you and your firm in a prime position by creating reports that will get you noticed and provide your clients with reports they never thought possible.
Reach Reporting is built on a powerful spreadsheet playground. Structure your chart of accounts to create any report you can imagine. Then with a mouse click, turn your report into a template and effortlessly auto-populate it with any connected client’s data anywhere, anytime.
Give your clients the financial visibility they need to thrive in today’s world.
Chart of Accounts Sampling
Chart of Accounts Sampling
The following numbering system would be similar to that of a midsized business.
10000 Asset Accounts
20000 Liability Accounts
30000 Equity Accounts
40000 Operating Revenue
50000 Operating Expense
60000 Overhead Cost & Expense
70000 Non-operating Revenue & Gains
80000 Non-operating Expense & Loss
The following are examples of Asset accounts:
10200 Petty cash
10300 Cash equivalents
10400 Short-term investments
10600 Accounts receivable
10700 Allowance for doubtful accounts
10900 Interest receivable
11000 Rent receivable
11100 Notes receivable
11900 Merchandise inventory
12400 Office supplies
12800 Prepaid insurance
12900 Prepaid interest
13100 Prepaid rent
14100 Long-term Investments
15200 Accumulated depreciation- Automobiles
154 Accumulated depreciation-Trucks
16000 Accumulated depreciation-Library
16200 Accumulated depreciation-Furniture
16300 Office Equipment
16400 Accumulated depreciation-Office equipment
17000 Accumulated depreciation-Machinery
17600 Accumulated depreciation-Building
17900 Land improvements
18000 Accumulated depreciation-Land improvements
18500 Mineral deposit
18600 Accumulated depreciation-Mineral deposit
19500 Leaseholds improvements
19700 Accumulated amortization
The following are examples of Liability accounts:
20100 Accounts payable
20200 Insurance payable
20300 Interest payable
20400 Legal fees payable
20700 Office salaries payable
20800 Rent payable
20900 Salaries payable
21000 Wages payable
21100 Accrued payroll payable
21400 Estimated warranty liability
21500 Income taxes payable
21600 Common dividend payable
21700 Preferred dividend payable
21800 State unemployment taxes payable
21900 Employee federal income taxes payable
22100 Employee medical insurance payable
22200 Employee retirement program payable
22300 Employee union dues payable
22400 Federal unemployment taxes payable
22500 FICA taxes payable
22600 Estimated vacation pay liability
23000 Unearned consulting fees
23100 Unearned legal fees
23200 Unearned property management fees
23500 Unearned janitorial revenue
23800 Unearned rent
24000 Short-term notes payable
24500 Notes payable
25100 Long-term notes payable
25300 Long-term lease liability
25500 Bonds payable
25800 Deferred income tax liability
The following are examples of Equity accounts:
30100 Owner’s Capital
30200 Owner’s Withdrawals
30700 Common stock, par value
30800 Common stock, no par value
30900 Common stock, stated value
31000 Common stock dividend distributable
31100 Paid-in capital in excess of par value, Common stock
31200 Paid-in capital in excess of stated value, No-par common stock
31300 Paid-in capital from retirement of common
31400 Paid in capital, Treasury stock
31500 Preferred stock
31600 Paid-in capital in excess of par value, Preferred stock
31800 Retained earnings
31900 Cash dividends
32000 Stock dividends
32100 Treasury stock, Common
32200 Unrealized gain-Equity
32300 Unrealized loss-Equity
The following are examples of Operating Revenue accounts:
40100 Fees earned from product one*
40200 Fees earned from product two*
40300 Service revenue one*
40400 Service revenue two*
40500 Commissions earned
40600 Rent revenue
40700 Dividends revenue
40800 Earnings from investments in “blank”
40900 Interest revenue
41000 Sinking fund earnings
41400 Sales returns and allowances
41500 Sales discounts
*A firm will have a varying number of these accounts depending on the number of products or
services the firm manufactures or offers.
The following are examples of Operating Expense accounts:
50100 Amortization expense
50200 Depletion expense
50300 Depreciation expense-Automobiles
50400 Depreciation expense-Building
50500 Depreciation expense-Furniture
50600 Depreciation expense-Land improvements
50700 Depreciation expense-Library
50800 Depreciation expense-Machinery
51000 Depreciation expense-Office equipment
51100 Depreciation expense-Trucks
52000 Office salaries expense
52001 Regular Pay
52003 Other / Bonus
52100 Sales salaries expense
52101 Regular Pay
52103 Other / Bonus
52200 Salaries expense
52201 Regular Pay
52203 Other / Bonus
52300 “Blank” wages expense
52400 Employees’ benefits expense
52500 Payroll taxes expense
53000 Cash over and Short
53100 Discounts lost
53200 Factoring fee expense
53300 Interest expense
53500 Insurance expense-Delivery equipment
53600 Insurance expense-Office equipment
54000 Rent expense
54100 Rent expense-Office space
54200 Rent expense-Selling space
54300 Press rental expense
54400 Vehicle expense
54402 Payment / Lease
54404 Parking / Tools
54405 Vehicle Insurance
54500 “Blank” rental expense
55000 Office supplies expense
55100 Store supplies expense
55200 “Blank” supplies expense
55500 Advertising expense
55510 Print Materials
55530 News, magazine, radio, TV
55540 Business Gifts
55550 Other Marketing & CRM expenses
55600 Bad debts expense
55700 Blueprinting expense
55800 Boat expense
55900 Collection expense
56100 Concessions expense
56200 Credit card expense
56300 Delivery expense
56400 Dumping expense
56600 Equipment expense
56700 Food and drinks expense
56800 Gas and oil expense
57100 General and administrative expense
57200 Janitorial expense
57300 Legal fees expense
57400 Mileage expense
57600 Miscellaneous expense
57700 Mower and tool expense
57800 Operating expense
57900 Organization expense
58000 Permits expense
58100 Postage expense
58200 Property taxes expense
58200 Repairs expense
58400 Selling expense
58500 Telephone expense
5870 Travel and entertainment expense
59000 Utility expense
59100 Warranty expense
59500 Income taxes expense
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