Chart of Accounts

Depending on your reporting requirements you may need to configure your Chart Of Accounts (COA) to specifically meet business or compliance objectives.

Having a well thought out COA is the key component of understanding your business position and performance. It doesn’t matter what kind of business you have, the main thing to remember is that this initial setup will be paramount to how easily you can get a “birds-eye” view of how your business is operating.

It’s normally ‘best practice’ to design your COA in consultation with the business owner and your accountant.

Additionally, if your business is a Reporting or Non-Reporting entity, this will impact how you need to structure the COA and what report information needs to be available for each reporting period.

If you have a group of entities, I always suggest to clients to first formulate a standard chart of accounts that will apply to all businesses in the group regardless of its nature or operations.

Functionality like consolidations, job, divisional and project costing are also key considerations when building your COA.

The Trial Balance

In any accounting system, the two key reports you will need to design for your business will be the Profit and Loss Statement (Statement of Financial Performance) and the Balance Sheet (Statement of Financial Position).

Together these reports are the cornerstone of your accounting system and consolidated together are normally referred to as the Trial Balance (TB) for the business.

A TB is simply just a list of all the accounts in your COA that make up your financial position and financial performance. The list is further broken up by whether the transaction is a debit or credit in a double-entry system. Typically these two debit and credit columns should be the same to indicate a balanced journal and any disagreement indicating an error.

It’s probably helpful to look at a typical chart of accounts layout and in this example, I have chosen MYOB’s new hybrid accounting system named Account Right 2018.

MYOB is one of the top accounting package vendors used in Australia and probably the most familiar package for those working in the public accounting industry.

To give you some perspective of the considerations here is how MYOB’s COA functionality works.

Note that these concepts can be applied to any accounting systems on the market today.

So how does a typical COA work?

There are 4 structured levels in most COA’s and in the MYOB example below we see the Level 1 are system generated headers used to group all lower headers and the detailed transaction posting accounts in the COA structure .

The COA for the accounting system is divided into 8 system header groups which contain the following account types.

1. Assets – All asset accounts start with a “1-xxxx”
2. Liability – All liability accounts start with a “2-xxxx”
3. Equity – All equity accounts start with a “3-xxxx”
4. Income – All income accounts start with a “4-xxxx”
5. Cost of Sale – All cost of sale accounts start with a “5-xxxx”
6. Expense – All expense accounts start with a “6-xxxx”
7. Expense Other – All other expense accounts start with a “8-xxxx”
8. Income Other – All other income accounts start with a “9-xxxx”

These headers essentially represent how your account list will be segmented into reporting groups for the Profit and Loss and Balance Sheet report layouts.

The first level “system headers” are fixed and automatically calculate the value of all transactional and subheader grouping accounts in the header ranges.

In the MYOB system, you can customise the name of the header and whether a sub-total is calculated for this group of accounts when you produce the financial statement reports.

Level 2, 3 & 4 headers allow further grouping and/or reporting functionality depending on what your reporting or visual requirements are.

Below you can see an example for the Current Assets section used in the Balance Sheet.

Note that all headers are basically calculated by the MYOB system and don’t contain any transactions but simply the aggregated values of the detailed accounts in the header account ranges.

Creating a logical header structure will allow you to group accounts for your specific reporting purposes. It also provides some grouping options for the detailed posting accounts.

Here is an example Balance Sheet grouping which I have used for reporting entities in the past.

The transactional accounts in your COA shown at level 4 for the balance sheet hold all the individual debit and credit journal transactions from each of your source ledgers.

It may be a journal entry, purchase invoice, cash receipt or payment transaction you will find in these accounts.

The example below illustrates a suggested report grouping for Cash and Cash Equivalents under a header control group I created for “Current Assets”.

Within, the level 4 transaction accounts I have adopted a “numbered grouping sequence” that is used to order and group these accounts into segments which is extremely useful when trying to standardise account ranges across multiple businesses and entity types.

This is particularly relevant if you are required to produce consolidated or group-based reporting like job and project costing and also allows you to expand the accounts in these ranges as new accounts are required over time.

Using a grouping method for your account numbers can extend the report options you have available especially if you use Power BI or Excel for advanced report requirements.

In the above image, the four-digit account numbering (1-xxxx) can be manipulated to order a group of similar accounts together and provide a further level of reporting and understanding for the users.

For example, all cash at bank accounts will start with a 1-11xx. This combination will allow up to 99 sub bank accounts in this range ie. 1-1101 to 1-1199.

The next range 1-12xx represents Term Deposits, then 1-13xx represents Clearing accounts and so on.

This method will allow you to have 9 sub-groups for cash and cash equivalents grouping from 1-11xx to 1-19xx.

As you can see a little thought when setting up your COA can save you a lot of pain further down the track and allow your chart of accounts to grow as your business does too.

I have seen many badly designed chart of accounts and given it’s importance to the business owner and key stakeholders this issue is really very important in any business.

Having worked in and consulted to many public accounting practices over the last 2o years, I always tried to avoid working on client jobs that had a COA that:

• was not organised in a logical manner
• contained pages and pages of accounts and sub accounts
• did not provide easily identifiable insights for the business owners and stakeholders
• did not allow for departmental, divisional or project-based transactional reporting

Look out for my future posts where I will explain the COA for the Profit and Loss, Job Costing considerations and generating project cash flows using Power Business Intelligence (a Microsoft product also known as Power BI) and MYOB which work really well together!

If you are an accountant or business owner and have not heard of Microsoft’s Power BI yet, I would encourage you to check out some YouTube videos to see exactly what it does and how it can improve the way you work with your clients! My website also has a Power BI solutions gallery so have a look to see the kinds of reports you can build.

Reach out to me if you need any help through my Linked In profile.