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Creating an Effective Chart of Accounts

by Lindsay Gleason, Accounting and Finance Services Consultant

Careful development of a Chart of Accounts is one of the most important facets of financial reporting. The Chart of Accounts provides structure for score keeping and sets the stage for how the Income Statement and Balance Sheet will organize data into meaningful reports.

We can quickly and easily dig into the detail of just what exactly comprises the net profit in the Income Statement - if the Chart of Accounts is properly established. Accurate Ratio analyses may also be calculated from the Balance Sheet, indicating your overall financial health.

An effective Chart of Accounts is limited to minimize human error that occurs when large numbers of accounts are used, and reduces the time required to work with so many. Of course, there can be too few accounts - combining data that should be reported separately. Generally, accounts with less than $1k annually should be folded into other accounts. 

Accounts should be numbered; otherwise accounting software will just sort within account type (income, expense, asset, etc.) alphabetically. A numbering system we have found quite effective for IT VARs is:

• 1000 series cash,
• 1200 A/R,
• 1300 Other Current Assets,
• 1400 Fixed Assets,
• 2000 A/P,
• 2100 Other Current Liabilities,
• 2200 Long Term Liabilities,
• 3000 for equity,
• 4000 Product Sales,
• 4100-4200 Service Revenues,
• 4300 Freight Revenue,
• 5000 Cost of Goods Sold,
• 5100 Service Department Expenses,
• 5200 Sales Department Expenses,
• 5300 Freight Expense,
• 6000 General & Administrative Expenses, and
• 7000 Non operating income/expense such as interest etc.

 Ongoing maintenance of the Chart of Accounts is important. Once a year, it should be reviewed to determine if accounts should be inactivated, combined or broken out into more detail.

 Numbering sections allows you to easily measure results against benchmarks and provide minimum guidelines for financial success. One may also download the sections of financial data into the Roadmap to Profitability Financial Dashboard to analyze data visually, see trends, and project “what if” scenarios. 

Separating Sales and Service into their own respective revenue and expense sections allows you to create reports for your Sales & Service Mangers to measure their success and provide them with individual P&Ls with which to manage their businesses.

 A properly structured chart of accounts also allows you to monitor the profitability of different lines of business.  For example, a company that sells telephone systems and also sells document imaging systems would be wise to separately track the revenues and expenses for these two lines of business.  This practice would help those who perform your product management functions to analyze each line of business and to initiate actions as appropriate.

 Strategic as well as operational management decisions rely on a carefully organized Chart of Accounts.  If your financial reports are not giving your managers the information they need to actively manage their departments or lines of business, you may wish to examine our sample chart of accounts for IT Solution Providers.  You will find it in our Client Resource Center at www.taylorbusinessgroup.com (login required) or simply email your request to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  We are happy to help you with any questions or issues regarding your accounting/finance functions.

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