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 may be some limited ability to group the data tags in one or two levels.
Accounting Seed is far more sophisticated than most accounting systems because what is typically a single data field in a traditional accounting system is actually fourteen (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 you can add an unlimited amount of their own tag groups (no limit on the amount). This allows you 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 needed. This is often because their legacy accounting system was not as robust 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.
Follow these steps for designing your Chart of Accounts:
- Educate yourself on the 14 data tags .
- Determine the number of Ledgers you need to record actual results .
- Design your Chart of Accounts in a spreadsheet. Set up 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 this example of a Chart of Accounts Design spreadsheet. The company in this example is only using one GL variable, therefore there is only one tab.
Note: There should be a tab for each variable you are using.
Click a link below to learn more about the following:
- Summary of GL Data Tags
- General Ledger (GL) Account
- GL Variable 1-4
- Labor Variable 1-2
- Project Task
Summary of GL Data Tags
The 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. Following the table is an introduction to each data tag (including examples of common tag groups) as well as suggested best practices in design.
|GL Data Tag
|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. The four types of Ledgers include the following:
- Transactional Ledgers - used to record actual results for an organization(s).
- Budget Ledgers - used to record planned or forecasted results for comparison against transactional Ledgers.
- Consolidations-Transactional - used to record the combination of actual results from two or more organizations.
- Consolidations-Budget - used to record planned or forecasted results for comparison against Consolidations Ledgers.
Important: In Accounting Seed, each additional Transactional Ledger and each Consolidations-Transactional Ledger is counted towards the Ledger limit. However, Budget Ledgers and Consolidations-Budget Ledgers are not counted as additional Ledgers. Eliminations Ledgers are also not counted as additional Ledgers.
Important: For new and existing Accounting Seed users, once the Spring ’23 release has been installed, you should review the values on the Default GL Accounts screen to make certain that default GL Accounts display correctly for each Transactional Ledger. If no default GL Accounts display in the Default GL Accounts screen, the Create GL Account Defaults button will be available. Click Create GL Account Defaults to have the system automatically add default GL Accounts. For new AS users, once this button is clicked, the system will create default GL Account records based upon “out of the box” GL Accounts and populate the fields on this page with those values. For existing AS users, if this button displays and is clicked, the system will create and populate default GL Account records based upon the values on your default Ledger.
The Default GL Accounts screen can be accessed directly from a Ledger record by clicking the Ledger GL Accounts button. Additionally, you can set up different default GL Accounts for each Ledger. When you add a new Transactional Ledger, the “out of the box” default GL Accounts will automatically be set on the newly added Transactional Ledger. You will need to review them by going to the Default GL Accounts screen, and then selecting each Ledger.
Consolidations Ledger Considerations
When creating a Consolidations Ledger, keep the following points in mind:
- Consolidations-Transactional and Consolidations-Budget Ledgers are manually created and/or deleted.
- Eliminations Ledgers cannot be manually created and/or deleted. An Eliminations Ledger will automatically be created when a Consolidations-Transactional Ledger or Consolidations-Budget Ledger is created. For example, a Consolidations-Transactional Ledger with the Ledger Name of “West Coast” was created. The Eliminations Ledger of “West Coast - EL” will automatically be created.
- When a Consolidations-Transactional Ledger or Consolidations-Budget Ledger is deleted, the respective Eliminations Ledger will automatically be deleted.
- A Consolidations Ledger cannot be deleted if it or the related Eliminations Ledger has associated records, or they are part of a Ledger Hierarchy in Set up Consolidations.
- If you have Multi-currency, the currency for the new Consolidations-Transactional Ledger or Consolidations-Budget Ledger will need to be selected from the Currency drop-down list at the time of creation in the New Ledger dialog box.
- Consolidations-Transactional Ledgers and Consolidations-Budget Ledgers can be cloned. The respective Eliminations Ledgers will automatically be created as part of the cloning process. Eliminations Ledgers cannot be cloned manually.
- A Consolidations-Transactional Ledger and/or Consolidations-Budget Ledger cannot be selected as the Ledger lookup on source records.
- The only source records that can be created for an Eliminations Transactional Ledger are Journal Entries and Recurring Journal Entries.
- Only manual Financial Cubes can be created for an Eliminations Budget Ledger.
Creating a new Ledger should be a rare event for your organization. This would be the equivalent of starting a new company.
The Enable Pre-Tax Discount Calculation checkbox is available on the Ledger screen to allow discounts on Billings to be calculated on a pre-tax basis (subtotal instead of total amount) when this checkbox is selected. When this checkbox is de-selected (unchecked), discounts on Billings will be calculated on the total amount.
Note: If the Enable Pre-Tax Discount Calculation field does not already display on the Ledger screen, you can add it. For more information, refer to the Add Enable Pre-Tax Discount Calculation to the Ledger section of the Winter ’24 Configuration Changes article.
The Enable Pre-Tax Discount Calculation field is available for AS Native Tax and Avalara AvaTax when using Header Level Posting (HLP) or Line Level Posting (LLP).
General Ledger (GL) 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 or two GL accounts per year but not at a frequency much greater than this.
Naming GL Accounts
Accounting Seed recommends naming your GL Accounts with numbers followed by a dash and text. The numbers allow easy sorting of the trial balance and other key reports while searching for GL Accounts by typing in the first few characters of the account name. It is best to leave gaps in number ranges so you can add additional GL accounts in the future where they may best fit.
Example: 1000-Cash Bank of America Checking
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. Below is a typical order of liquidity for assets with some example GL accounts:
- Cash (Example: 1010-Cash Savings Bank of America)
- Accounts Receivable (Example: 1200-Accounts Receivable)
- Prepayments (Example: 1400-Prepaid Expenses)
- Deposits (Example: 1450-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. Most customers set up credit cards and lines of credit as "Bank" GL accounts in Accounting Seed. Below is a typical order of liquidity for liabilities with some example GL accounts:
- Accounts Payable (Example: 2000-Accounts Payable)
- Credit Cards (Example: 2010-Chase Credit Card 9176)
- Lines of Credit (Example: 2020-BOA Line of Credit)
- Accrued Expenses (Example: 2100-Accrued Expenses)
- Notes Payable (Example: 2600-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/distributions
- 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 "4". (Example: 4000-Product Revenue)
5--- Cost of Goods Sold typically begin with "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 "9."
- 9000-Realized Gain/Loss on Foreign Currency Exchange
- 9010-Unrealized Gain/Loss on Foreign Currency Exchange
- 9500-Interest Income
GL Account Grouping
There are three levels of grouping of GL Accounts that work with the standard Accounting Seed financial reports. However, within the Accounting Seed custom financial reporter, an unlimited number of GL Account Groups can be formed.
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
Sub Type 1 is the next sequential grouping layer. Sub Type 1 for Balance Sheet Type GL Accounts is fixed. The values are Assets, Liabilities, and Owners Equity. Sub Type 1 for Revenue and Expense GL Accounts are 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 transactions can be booked to a title GL account or entry-level GL Account. Accounting Seed does not use title accounts to aggregate GL accounts, instead Type and Sub Type data fields are used 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 "sub-accounts" 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 its business model.
Labor Variable 1-2
Labor variables are used to track categories of labor for reporting. There are two labor variables that are available for entry on the time card line. You 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 data as well as expenses. They are powerful for 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 Price books. 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 a Single 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 set up products to break this down into more discrete chunks in order to budget and analyze expense trends like:
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 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. Internal time spent on the work and external expenses can be tracked. With this data, engagement profitability can be measured and compared to its budget. Examples of customer engagements and events include:
- Professional services
- Construction services
- Government contracting
- Moving goods
- Sporting events
- Music concerts
- Theatre shows
Vendor Engagements are contracts in which you hire a vendor to perform specific work. 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 company website
- Installing a software application
- Setting up a new office
Internal initiatives are work projects assigned to staff members. Tracking internal initiatives allows for good planning as well as 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 the true costs of marketing and measure Return on Investment (ROI) 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 to the budget at the Project Task level.
Accounts are customers and vendors. Accounts are tracked with all of your transactional data 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 to 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.
In order for GL Accounts to be set up correctly, we have validations to ensure that the following GL Accounts have unique values:
- AR Control, Default Revenue, Customer Payment Adjustment, Unapplied AR, AP Control, Prepaid Expense, Vendor Payment Discount, Current Year Earnings and Retained Earnings. The Default Project Task and Labor Clearing GL Accounts fields should be unique when compared to the other GL Accounts listed in this section. However, they can be set to the same GL Account.
- For Multi-currency users, the above list includes: Currency Gain/Loss and CTA GL Accounts.
- For Orders and Inventory users, the following GL Accounts are also validated for unique values: Inventory Variance, Vouchers Payable and Work in Process GL Accounts.
Winter ’24 Release
- The Enable Pre-Tax Discount Calculation setting has been added to the Ledger screen.
Summer '23 Release
- In order for GL Accounts to be set up correctly, we have validations to ensure that the GL Accounts listed above in the Validations section have unique values.
Spring ’23 Release
- When using Multi-Ledgers, you now have the ability to configure default GL Accounts by Ledger.
- The Default GL Accounts screen can be accessed directly from a Ledger record by clicking the Ledger GL Accounts button.