Kelcee Blue | Director of Strategic Finance
Are your financial reports telling you what you need to know? If you feel like there’s a gap in your financial data, the problem might be with your chart of accounts. A well-designed, logical, and appropriate chart of accounts (CoA) is an important building block in creating an effective flow of financial information.
Here’s a look at what you need to know about your chart of accounts and why it’s important.
What is a Chart of Accounts?
A chart of accounts (CoA) is a structured list of all financial accounts used by a business. It serves as the foundation for the accounting system, allowing transactions to be grouped and aggregated for financial reporting purposes.
The CoA is multi-dimensional, including more than just a single coded identifier. Typically, the Chart of Accounts will include segments for:
- Company or Legal Entity
- Transaction Type (Account)
- Class or Cost Center (Department)
- Project or Initiative
The chart of accounts is tailored to fit the specific needs of an organization, reflecting its unique operations, reporting requirements, and financial management needs. This structure enables clear and systematic financial reporting, which is crucial for internal management decisions and external compliance with tax and other accounting standards.
How is a Chart of Accounts Used
In day-to-day accounting processes, an accountant or bookkeeper will record all transactions to a general ledger that includes coding from the chart of accounts segments. This coding dictates where a transaction will be reflected on financial statements.
The CoA is owned by the Accounting team. In small or early-stage companies, the bookkeeper initially creates the chart of accounts. Often, bookkeepers will use the default chart of accounts provided in Quickbooks. As the company grows, the CoA should be reviewed and adapted to meet the current needs of the business. In larger corporations, it is managed by the Controller with more strategic oversight.
Why Founders/Leaders Should Care About the CoA
Every strong building requires a stable foundation. The same is true of your business finances, beginning with your chart of accounts. This list is an important building block for well-organized financial statements that can provide valuable insight into your operations.
Your finances should reflect your specific business. For example, if you have multiple revenue streams, your CoA should also have different accounts for each revenue stream and corresponding cost drivers. This way, you can look at the margin by product/service type to make informed, targeted decisions for investing in growth.
If your financial statements are too high-level or generic, they might meet requirements for tax filing but they won’t be truly useful. It will be difficult to make data-informed decisions or to adequately diagnose risks and evaluate opportunities.
“A problem well-stated is a problem half-solved” as famously attributed to Charles Kettering. When it comes to structuring business financials, the value or usefulness is in a clear picture of your business. This starts with the Chart of Accounts.
Contact Embarc Advisors for support with organizing your CoA and drawing value from your financials. Our Strategic Finance team can oversee bookkeepers, provide guidance, and dive deeper into your financial analysis to give you the tools and information you need to drive sustainable, profitable growth.
