Designing a good chart of accounts is very much an art and not a science. A chart of accounts in most traditional accounting systems refers to a single data tag used to classify an asset, liability, equity, revenue or expense that the company incurs. There's some limited ability to group the data tags in one to two levels.
Accounting Seed is far more sophisticated than most accounting systems in what is typically a single data field in a traditional accounting system is actually 14 data tags with an unlimited number of tag groups in Accounting Seed.
There are many tag groups already included in the core Accounting Seed application but users can add an unlimited amount of their own. This allows users to segregate and report on data in the general ledger in literally millions of different ways.
How to Design a Chart of Accounts in Accounting Seed
A good chart of accounts and general ledger system will accept a spectrum of change that is natural and complementary to your business. The Accounting Seed chart of accounts and general ledger will allow for data that changes on a spectrum ranging from very infrequently changing to constantly changing. This type of structure will provide stability and consistency with the level of detail in which you are viewing your financial data.
Designing a good chart of accounts in Accounting Seed is often much easier than in other systems since so much of the key data you need is already accounted for in the general ledger. The tendency we often see is that users want to build more complexity into their chart of accounts than is often needed. This is often because their legacy accounting system was not as robust as with data tags as Accounting Seed. Since the Accounting Seed general ledger is so powerful and flexible, the chart of accounts design process is much less stressful because the general ledger data can be naturally grouped and analyzed in a large variety of ways.
We recommend the following steps for designing your chart of accounts:
- Educate yourself on the 14 Tags
- Determine the number of ledgers you need to record actual results
- Design your Chart of Accounts in a spreadsheet. Setup a spreadsheet with the following Tabs:
- Balance Sheet GL Accounts
- Revenue GL Accounts
- Expense GL Accounts
- A single Tab for each GL Variable
Please see an example of a Chart of Accounts Design spreadsheet below. This company is only using 1 GL variable so there is only 1 tab. Please note you should include a tab for each variable you are using.
Summary of GL Data Tags
Your first step is to educate yourself on the 14 data tags included in the Accounting Seed General Ledger. The following table gives a summary of the 14 data tags. Below we are going to give you an introduction to each data tag and give examples of common tag groups as well as discuss best practices in design.
|GL Data Tag||Typical Use||Frequency of Change||Common Tag Groups|
|GL Variable 1-4||
|Labor Variable 1-2||
Ledgers are used to track the actual results of companies or legal entities as well as budgets. There are 2 types of Ledgers: Transactional and Budget. Transactional ledgers are used to record actual results for your organization(s). Budget ledgers are used to record planned or forecasted results for comparison against transactional ledgers. Creating a new ledger should be a rare event for your organization. This would be the equivalent of starting a new company.
GL Account is short for General Ledger Account. The GL Account is for your main financial classifications of your top-level financial statements used to compare year-to-year results and present them to your investors. GL Accounts are typically not changed very much unless there are significant changes in your business model. It would be common to add one to two GL accounts per year but not at a frequency much greater than this.
Naming GL Accounts
We recommend naming your GL Accounts with numbers followed by a dash and text. The numbers allow you to easily sort the trial balance and other key reports while users can search for GL Accounts by typing in the first few characters of the account name. It is best to leave gaps in numbers so you can add additional GL accounts in the future where they may best fit.
Example: 1000-Cash Checking Bank of America
Ordering GL Accounts
When naming GL Accounts it is typical to follow the number convention below:
1--- Assets will typically begin with 1 and are ordered by liquidity. The less liquid the asset the higher the GL account number. Most customers setup credit cards and lines of credit as bank accounts in Accounting Seed. Below is a typical order of liquidity for assets with some example GL accounts:
- Cash (Example: 1010-Cash Savings Bank of America)
- Lines of Credit (Example: 1020-Line of Credit BOA)
- Credit Cards (Example: 1030-Capital One Credit Card 9867)
- Accounts Receivable (Example: 1200-Accounts Receivable)
- Prepayments (Example: 1210-Prepayments)
- Deposits (Example: 1220-Deposits)
- Inventory (Example: 1500-Inventory)
- Fixed Assets (Example: 1600-Fixed Assets)
- Intangible assets (Example: 1800-Goodwill)
2--- Liability accounts begin with 2 and are also ordered by liquidity. The less liquid the liability the higher the GL account number. Below is a typical order of liquidity for liabilities with some example GL accounts:
- Accounts Payable (Example: 2000-Accounts Payable)
- Accrued Expenses (Example: 2010-Accrued Payroll)
- Notes Payable (Example: 2100-Bank Note Payable)
- Long Term Debt (Example: 2700-Long Term Debt)
3---Equity accounts typically begin with 3. It is common to just have a few equity accounts as detailed below:
- Opening Balances (Example: 3000-Opening Balances) Used for data migration
- Company Stock (Example: 3010-Issued Stock) Typically not used for small businesses
- Contributed Capital (Example: 3020-Owners Contributions) Owner contributions/dist
- Current Year Earnings (Example: 3050-Current Year Earnings) System account required
- Retained Earnings (Example: 3060-Retained Earnings) System account required
4---Revenue accounts typically begin with a 4. (Example: 4000-Product Revenue)
5---Cost of Goods Sold typically begin with a 5. (Example: 5000-Direct Labor)
6,7,8 ----Labor, Sales, Facilities and Marketing often begin with these numbers. This does vary quite a bit by industry. It is best to group all of one category of accounts together. Examples:
- 6000-Staff Labor
- 7000-Office Rent
9---Other income and expense often begin with a 9.
- 9000-Realized Gain/Loss on Foreign Currency Exchange
- 9010-Unrealized Gain/Loss on Foreign Currency Exchange
- 9500-Interest Income
Grouping GL Accounts
There are three levels of grouping of GL Accounts that work with the standard financial reports. However, you are able to form as many GL Account Groups you need when using our custom financial reporter.
The following fields on the GL account are used in grouping for standard financial reports:
Type has three values and is not customizable for your own values. The values are:
- Balance sheet
Subtype 1 is the next sequential grouping layer. Subtype 1 for Balance Sheet Type GL Accounts is fixed. The values are Assets, Liabilities, and Owners Equity. Subtype 1 for Revenue and expense GL Account is completely customizable with your own values.
Sub Type 2 is the next sequential grouping layer and is completely customizable for all GL Accounts regardless of Type.
Title or Roll-up GL Accounts
In some accounting packages, “Title” or “Roll-up” accounts are used to aggregate other entry-level GL Accounts. This means you can book transactions to a Title GL account or entry-level GLAccount. Accounting Seed does not use Title Accounts to aggregate GL accounts, we simply use Type and Sub Type data fields to aggregate transactions for reports. Therefore, all transactions must be booked to an entry-level GL account.
GL Variable 1-4
GL Variable is short for General Ledger Accounting Variable. GL Variables are often referred to as "subaccounts" on other systems or "classes" in a program like Quickbooks. GL Variables are used to track major groups or areas in your business like:
- Cost Centers
- Lines of Business
Companies with fewer than ten employees typically do not need to use GL Variables. GL variables are flexible and can be changed, but typically don't change often unless the company has grown significantly or changed business models.
Labor Variable 1-2
Labor variables are used to track categories of labor for reporting. There are 2 labor variables that are available for entry on the time card line. A user can tag time card line data to the variables. Labor variables are typically used to aggregate time entry in the areas listed below:
- Work Location
- Work Group
- Work Type
Products are used to track detailed level sales and revenue as well as expenses. They are powerful in doing more detailed analysis and budgeting of your financials. They are flexible and change often.
Products for revenue are easily defined in a product or productized services based company. For example you sell outdoor winter jackets or you wash cars. These would be the things you sell and put in Pricebooks. However, service companies often benefit from defining groups of similar services for analysis using product tags even if this is something they only use internally for budgeting and management reporting.
For example, a consulting services company may bill for time based on a client engagement and the experience level of the individual who is doing the work. Using a product tag to designate the same type of service done by different individuals is very powerful when analyzing revenue expansion and profitability options.
Products are especially powerful when analyzing, budgeting and categorizing expenses. Two specific use cases for products are detailed below:
Buying multiple things from 1 vendor
For example, let’s say you are purchasing a lot of supplies for your business from Amazon.com. It would be beneficial for you to setup products to break this down into more discrete chunks in order to budget and analyze expense trends like:
- Office Snacks
- Office Drinks
- Office Equipment
- Office Supplies
Buying the same thing from multiple vendors
Let’s say you are purchasing pay per click advertising online through Facebook, Google, Adroll, etc. Rather than creating e a GL account for each type of advertisement expense that may change frequently depending on the success rate, you could simply create a product called “Pay Per Click Ads”. It would also be beneficial to tag all the companies you are purchasing this from as a product. This would allow you to keep your GL account structure more simple with something like “7000”-Advertising with products used to track the detailed spending that changes frequently like print, pay per click, magazine, email etc.
Projects are used to track customer and vendor engagements and events, as well as internal initiatives. Projects are a very powerful analysis tool and are frequently underutilized by organizations. Projects change constantly, but examples of common uses are below:
Customer Engagements or Events
Customer engagements or events are contracts you have with customers to perform a service or produce an event. You are able to track your internal time spent on the work and external expenses. With this data, you can measure the profitability of an engagement and compare it to budgets. Examples of customer engagements and events include:
- Professional Services
- Construction Services
- Government contracting
- Moving goods
- Sporting games
- Music Concerts
- Theatre shows
Vendor Engagements are contracts in which you hire a vendor to perform work for you. Again you are able to track your internal time as well as external expenses. With this data, you can measure your costs against a budget and assess vendor performance. Examples of vendor events are:
- Building a website for your company
- Installing a software application
- Setting up a new office
Internal initiatives are work projects you have assigned to staff members. Tracking internal initiatives allows for good planning and analysis of employee performance.
Marketing events are trade shows, dinners and presentations that your company performs to attract new business. Marketing events are a huge opportunity for your company to track true costs of marketing and measure return on investment for events
Project tasks are sub-elements of a project. They are used to track components, milestones, or the work breakdown structure of a project or event. Project tasks have the ability to store budget data so that actual transactions can be compared the budget at the project task level.
Accounts are customers and vendors. Accounts are tracked with all of your transactional data right in the general ledger. They are something you do not need to consider when building your chart of accounts since the account is captured automatically. It is expected that accounts change constantly. You are able to group customer or vendor data by any data field on the account.
A contact is a person outside of your company. Contacts are captured in the general ledger if they are related to an accounting data record.
A user is an individual in your company. Users can be captured in the general ledger if they are related accounts payable, time card entry, or specifically identified in journal entries. Some companies segregate payroll data by user, or through incentive accruals and expenses. Companies with concerns about data privacy do NOT often tag data to users. Identifying users is entirely optional; the infrastructure to do so is built into the platform.