QuickBooks E-News Central -- Small Business Feature

Chart of Accounts Checkup
By Sandi Smith, CPA

You've just posted your last transaction for 2004 to the books. Excitedly, you run a Profit and Loss Report to see how your company did. To your horror, you see many accounts with zero balances, and many other accounts with huge balances. Before you can hope to have a smooth accounting for the coming year, you're going to have to give your Chart of Accounts a check-up.

There's no time like the end of the year to review your chart of accounts. As you're going over your year-end Profit and Loss Report, take the time to determine the purpose of each of the accounts in the Chart of Accounts. Are business decisions easily made based on how the numbers are categorized into accounts? Or are some balances simply lump sums that don't really tell you anything useful for running your business?

The Well-Designed Chart of Accounts

Can you tell which promotion brings in the most sales? Can you tell which expense is most out of line? These questions can be answered with a well-designed Chart of Accounts.

I'm assuming that you are either the primary bookkeeper for the company (external or internal) or you are the owner. Either way, you are on the front line of your company transactions. That gives you an innate feel for the company's accounts.

Here are some questions you can review to determine if the current Chart of Accounts is meeting business decision-making needs.

			Income Accounts. Is there one large account for all sales? Could you learn more if sales were broken out by product or service line, geographic region, customer type, or department? Should promotions or discounts be booked in a separate account from regular sales? Based on those answers, you may want to create more accounts that will answer these questions. You might also be able to solve these issues with Classes or Subaccounts.
			Expense Accounts. Which accounts contain balances that seem over budget? Should there be additional accounts to further break down the spending trends in these areas? Which accounts contain small, immaterial balances (that do not need to be separated for regulatory record keeping) that could be combined? Combining accounts with immaterial balances will save review time all year long.
			Other Issues. Are there income/expense accounts that aren't used at all? These accounts could be candidates for inactivation or deletion.
			Asset and Liability Accounts. Many bookkeepers will leave the asset and liability accounts to the CPA. However, there are a few things you can double-check. Do account names easily define what the account contains? Are accounts classified in the right category; short-term and long-term? Are subaccounts used when it makes sense? For example, a construction company that owns several trucks could put one in each subaccount under a main Auto account. This will make it easier when each truck is sold.
			Subaccounts. Are subaccounts used properly? If multiple accounts crowd the chart of accounts, then subaccounts could be the right solution.
			Numbering. Is the use of account numbers necessary or does it add number clutter to the Chart of Accounts? This is a personal preference of each company. Whatever your approach, make sure that you are consistent and that you are getting the best use out of the approach.

December is the perfect time of year to give your Chart of Accounts a check-up. Revamping the chart of accounts now will make your job easier for the year to come.

Sandi Smith, CPA, has helped people use technology effectively for 20 years. She conducts workshops, speaks at conferences, consults with business owners, and has authored three books and numerous articles on a variety of technology topics. She can be reached at sandi@sandismith.com.

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