Is Your Chart of Accounts Too Long?Posted on April 17th, 2018
Ever find yourself taking minutes to classify simple transactions? Do you periodically spot accounts in your chart of accounts that you did not know existed? These might be signs that your chart of accounts is too long!
A Profit and Loss report (P&L) is meant to provide management with a bird’s eye view of your organization’s financials. If more detail is desired, additional reporting would be better than an overly detailed P&L. In QuickBooks, using classes is a great way to create additional dimensions in reporting, and you can create customized reports to analyze your finances using a myriad of parameters.
It all starts with a solid chart of accounts. An effective chart of accounts will take into consideration tax reporting guidelines to ensure necessary items are tracked on the P&L. Tax forms generally require very high-level P&L detail, and your P&L should mirror this reporting.
Bookkeepers and management are often misled to believe that an exhaustive chart of accounts is better because it provides more detail for reporting, but this can backfire and cause issues such as the following.
No one wants inaccurate reporting, but it’s easy to achieve with a lengthy chart of accounts. Having too many accounts makes it difficult to classify transactions. For example, you may have accounts for Communications and Utilities. Which account would you use for telephone expenses? What about email? If you have multiple people working on your books, there’s a good chance that expenses will be inconsistently classified and your budgets and prior period comparisons will be inaccurate.
Immaterial Balances in Accounts
This happens when accounts are too specific and each account contains few or even a single type of expense. Let’s expand on the example above: say you split Utilities into Phone, Internet, Garbage, Gas and Electricity, and Water. It may not seem like a big deal, but splitting your chart of accounts like this can prevent your organization’s ability to meaningfully analyze the P&L.
A high level of detail typically hinders meaningful analysis since it is more difficult to focus on the bigger picture and associated trends. The amount your organization spends on water is probably not significant in the grand scheme of things, but the total you spend on utilities or location-related items might be. With so many accounts, you risk wasting time analyzing variances that do not truly impact the company’s financials.
What We Recommend
Most organizations can limit their P&L to 30 income and expense accounts. Here are some steps you can take to condense your chart of accounts:
- Review your chart of accounts to identify which accounts are too specific or too similar to other accounts.
- Shorten or change account names to make them more generic. For example, if you currently have accounts named Website Development and Website Hosting, you could consolidate them into one Website account. Or if you have individual accounts called Hotel Accommodations, Airfare, Taxis, etc., consolidate them into one Travel account. Related accounts, as in this example, are often dependent on one another, so it makes sense to budget for and analyze the total.
At Moss CPA, we strive to ensure each client’s chart of accounts meets all reporting requirements for management, as well as tax authorities. If you have any questions about whether your chart of accounts can benefit from some optimization, please feel free to reach out to us!