Is Your Chart of Accounts Working For You?

Presented By: Steve Adair

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COA Design – An Overview

• The Chart of Accounts (COA) is the account structure the organization uses to record transactions and maintain financial account balances

• The COA structure is comprised of multiple uniquely defined segments

Chart of Accounts Impact on Reporting

The primary purpose of the General Ledger is financial reporting and analysis

• The COA defines the nature, ranges, and groupings of information available for reporting

• Management must define the dimensions by which financial data will be analyzed and reported

• They must also ensure those dimensions are reflected in the segments contained within the COA structure

Objectives in Chart of Accounts Design

• Departmental data

• Project data (Expense & Production/Billable Projects)

• Regional data

• Product line data

• Customer data

• Internal Revenue Service (i.e. details of travel & entertainment expenses, expenses eligible for research tax credits, and non-deductible expenses)

Objectives in Chart of Accounts Design

• Local taxing authority requirements, i.e. location of property & equipment by taxing jurisdiction

• Primary profit drivers

• Measure strategic goals

• Other significant factors identified by management

Chart of Accounts Best Practices and Development Guidelines

Structure

• Determine the scope that the chart of accounts must support

• Functionally align COA development team members

• COA should be flexible and reflect current business processes and future org changes

• Each measured dimension of the business should be a separate segment

• COA structure should be more horizontal in design

Chart of Accounts Best Practices and Development Guidelines

Values

• Use sub-ledgers for detail reporting

• Choose product segments carefully

• Project segments may be considered if not using Project Accounting

• Consider usage of summary accounts to capture information

• Avoid overuse of intelligent numbering

Chart of Accounts Best Practices and Development Guidelines

Values (cont.)

• Avoid alpha characters in segments

• Use all capital letters for data entry

• Document mappings to legacy chart of accounts

General Ledger Chart of Accounts Numbering System

• 1NNNNN...NN - Assets – generally numbered in order of liquidity

• 2NNNNN...NN – Liabilities

• 3NNNNN...NN – Owners/Shareholders Equities

• 4NNNNN...NN – Revenues

• 5NNNNN...NN – Cost of Goods Sold & Services

• 6NNNNN...NN – Selling, and General & Administrative Expenses

Standard Chart of AccountsASSETS

• 1000 CURRENT ASSETS

• 1200 RECEIVABLES

• 1300 INVENTORIES

• 1400 PREPAID EXPENSES & OTHER CURRENT ASSETS

• 1500 PROPERTY PLANT & EQUIPMENT

• 1600 ACCUMULATED DEPRECIATION & AMORTIZATION

• 1700 NON - CURRENT RECEIVABLES

• 1800 INTERCOMPANY RECEIVABLES

• 1900 OTHER NON-CURRENT ASSETS

Standard Chart of Accounts

• 2000 CURRENT LIABILITIES

• 2100 PAYABLES

• 2200 ACCRUED COMPENSATION & RELATED ITEMS

• 2300 OTHER ACCRUED EXPENSES

• 2500 ACCRUED TAXES

• 2600 DEFERRED TAXES

• 2700 LONG-TERM DEBT

• 2800 INTERCOMPANY PAYABLES

• 2900 OTHER NON CURRENT LIABILITIES

LIABILITIES

Standard Chart of Accounts

OWNER’S EQUITIES

• 3100 Common Stock

• 3200 Preferred Stock

• 3300 Paid in Capital

• 3400 Partners Capital

• 3500 Member Contributions

• 3900 Retained Earnings

Standard Chart of AccountsREVENUE

• 4010 REVENUE – PRODUCT 1

• 4020 REVENUE – PRODUCT 2

• 4030 REVENUE – PRODUCT 3

• 4040 REVENUE – PRODUCT 4

• 4600 Interest Income

• 4700 Other Income

• 4800 Finance Charge Income

• 4900 Sales Returns and Allowances

• 4950 Sales Discounts

Standard Chart of AccountsCOST OF GOODS SOLD

• 5010 COGS – PRODUCT 1

• 5020 COGS – PRODUCT 2

• 5030 COGS – PRODUCT 3

• 5040 COGS – PRODUCT 4

• 5700 Freight

• 5800 Inventory Adjustments

• 5900 Purchase Returns and Allowances

• 5950 Reserved

Standard Chart of AccountsOPERATING EXPENSES

• 6010 Advertising Expense

• 6100 Auto Expense

• 6200 Bank Charges

• 6300 Commission Expense

• 6400 Employee Benefit Program

• 6550 Freight Expense

• 6700 Interest Expense

• 6900 Meals and Entertainment

• 6950 Office Expense

Standard Chart of AccountsOPERATING EXPENSES (cont.)

• 7000 Payroll Taxes

• 7050 Printing

• 7150 Postage

• 7200 Rent

• 7300 Salaries Expense

• 7400 Taxes – FIT Expense

• 7500 Utilities Expense

• 7900 Gain/Loss on Sale of Assets

Benefits of Common Chart of Account Structure

• Drives consistency of reported information across business units and ensures compatibility

• Reduces the effort to consolidate information to satisfy management requests

• Reduces reconciliation procedures

For Organizations with more than one Company

Benefits of Common Chart of Account Structure

• Provides easier benchmarking between different business units/territories

• Allows ability to leverage staff between different business units

• Reduces learning curve due to commonality

• Provides a framework to introduce financial shared services

Problems in Chart of Accounts Design

• Too many general ledger accounts

• Too much detail in Selling General and Administrative Expenses

• Not enough detail in Revenue and Cost of Goods Sold Categories

• Cost of Goods Sold not aligned with Revenue

• No logic in assigning general ledger account numbers

• Poor titles on general ledger account descriptions

• Inadequate detail in Chart of Accounts

Problems in Chart of Accounts Design

• No departments, product lines or regional data tracked

• Chart of Accounts does not relate back to pricing model

• Using the Chart of Accounts for job costing

• No standard Chart of Accounts for different companies

• Not using a numbering system

• Using alpha numeric chart of accounts

• Not leaving gaps in the numbering system

Complex COA Numbering for SG&A Expenses

In lieu of a simple chart of accounts for selling general and administration expenses, you can design a numbering system with more information and structure

• 6NNNNN...NN, 7NNNNN...NN, and 8NNNNN…NN – Operating Overhead, Research, Selling, and General & Administrative Expenses

• 9NNNNN...NN – Non-Operating Income and Expenses

Complex COA Numbering for SG&A Expenses

Salary ExpenseThe 100 series may capture salary expense data as follows:

• Executive salaries

• Exempt Salaries

• Non-Exempt Salaries

• Overtime Compensation

• Incentive Compensation

• Vacation & Holiday

• Sick Leave

• Others appropriate to the company

Complex COA Numbering for SG&A Expenses

Fringe BenefitsThe 200 series may include fringe benefits data as follows:

• FICA

• Unemployment taxes – state

• Unemployment taxes – Federal

• 401(k) Contributions – Company Match

• Medical Benefits

• Educational Support

• Others appropriate to company

Complex COA Numbering for SG&A Expenses

Travel & Entertainment300s = Travel & Entertainment, such as:

• Airfare

• Seminar Fees

• Meals, excluding entertainment

• Entertainment

• Auto Rentals

• Mileage

Complex COA Numbering for SG&A Expenses

Office Expense400s = Office & Other Miscellaneous Expenses, such as:

• Office Supplies

• Insurance

• Miscellaneous Taxes & Licenses

• Donations

Complex COA Numbering for SG&A Expenses

Outside Services500s = Outside Services, such as:

• Legal Fees

• Accounting Fees

• Advertising

• Contract Labor

• Consulting Fees

Complex COA Numbering for SG&A Expenses

Rentals and Leases600s = Rentals & Leases, such as:

• Office Rent

• Equipment Rent

Complex COA Numbering for SG&A Expenses

Utilities700s = Utilities, such as:

• Electricity

• Natural Gas

• Propane

Depreciation and Amortization

800s = Depreciation & Amortization

Complex COA Numbering for SG&A Expenses

Non Operating Income and Expense900s = Non- Operating Income & Expense, such as:

• Interest Income

• Other Miscellaneous Income

• Interest Expense

• Other Non-Deductible Expenses

Complex COA Numbering for SG&A Expenses

So for example, a homebuilder may have the following accounts:

6 120 24 11- Construction Overhead; Non-Exempt Salaries; Subdivision 24; State 11

7 120 24 11- Marketing; Non-Exempt Salaries; Subdivision 24; State 11

Questions ???

References

OracleAppsBlog<http://www.oracleappsblog.com/index.php/weblog/comments/55/>

How to Develop a Chart of Accounts<http://www.wikicfo.com/Wiki/(S(iqjzkertp3wugk55bvqm2trp))/Print.aspx?Page=How%20to%20Develop%20a%20Chart%20of%20Accounts>