4 Design Considerations In Your Chart of Accounts

As organizations grow and become more mature small cracks appear in the once solid foundation. Even the most organized companies may feel unexpected growing pains. A once sufficient chart of accounts was not designed to adapt to the company’s ever changing requirements. Updating and modernizing a chart of accounts may profoundly impact how a company reviews and analyzes financial data.

1. Has there been an appropriate level of thought put into the development of the current chart of accounts?

Most accountants, whether starting a new job or in the same organization for years have no initial input in the chart of accounts. It is the responsibility of the accounting department to ask the question; Does the existing chart of address the corporation’s needs?

A well thought out chart of accounts requires senior management to sit down and discuss the financial reporting requirements of the organization. The chart of accounts should be designed to address these requirements. If this discussion has not taken place, there is a very good chance that the chart of accounts is insufficient or improperly designed.

2. How many accounts are in the existing chart of accounts? Many organizations have far too many accounts.

Entities which have insufficient training with their ERP systems, or have overly simplistic ERP systems, often rely on GL accounts as a tool for financial data analysis. Accounts are frequently created to track specific financial information which results in un-necessary complexity both from a maintenance perspective as well as financial reporting. Each additional unnecessary account increases the complexity of the financial reporting models which must be maintained by the accounting department. Not to mention the day to day attention each account requires.

A good, high quality ERP system should be capable of tracking and analyzing financial data in a far more sophisticated way than at the G/L level. Even large organizations can be run with a simple chart of accounts. If your organization has an overly complex chart of accounts the question should be asked “Is our ERP system being utilized to its full potential?” Too many organizations do not utilize their ERP system to address their accounting and reporting requirements.

3. Is the account structure appropriate? It is a common misconception that a more complex account structure will provide increased flexibility.

An organization may like the idea of additional unused account segments reserved for the future but the impact on day to day data entry is often overlooked. An overly complex account structure may lead to inefficiencies and errors in data entry.

A good ERP system should be capable of adding additional account segments in the future only as they are needed. Account structure should be kept as simple as possible while still being able to address all requirements of the organization.

4. Is the current chart of accounts organized? As entities evolve so does the chart of accounts.

An unorganized chart of accounts requires special understanding by individuals in order to use. This can lead to increased training time of new staff as well as increased data entry errors as staff struggle to find proper accounts. Often aging chart of accounts will become disorganized as a result of years account creation and deletion.

A properly organized chart of accounts should be intuitive to use. If your chart of accounts has become spread out, disorganized or difficult to use it may be time to consider reorganization of the accounts. A good ERP system will have tools available to remap accounts to help organize your chart of accounts. Your ERP consultant should have the experience to help guide you towards the ideal chart of accounts for your organization.