By Wiss Associate
As a business owner or executive, year-end processes and reporting can be a nightmare – but it doesn’t have to be. You don’t need to scramble when your accountant asks for your tax deductible items or when your auditor requests various reports so they can perform testing. It should be a simple process to go into your accounting system and run reports with 100% confidence they are complete and accurate. But how do you know if they are truly complete and accurate? It starts with your chart of accounts.
A Basic Understanding
Let’s start with a basic understanding of what your chart of accounts is…and isn’t. A chart is a list of detailed accounts that roll into one of five categories: assets, liabilities, equity, income, or expenses. These categories combine to create various reports such as an income statement (income & expenses), balance sheet (assets, liabilities, & equity), or cash flow (a mix of all five categories) along with many other ad hoc reports.
Not Too Little, Not Too Much
In working with numerous clients, I’ve seen instances of both “too much detail” and “not enough detail” scenarios within a chart of accounts. Among the “too much” offenders are companies that give information in detail that is too granular. An example of this is when a business might allocate three separate accounts for pens, staplers, and stationary, when a simple “Office Supplies” account would suffice.
Going the other way, businesses sometimes do not provide enough information. All account names should have a clear title so everyone in the accounting department understands what each account is for, which helps to easily and correctly classify company transactions. For example, you might have one account for “Business Trip Expenses” to capture all operating expenses related to lodging, flights, meals, and entertainment. Your goal is to have the minimum number of accounts with enough detail to help make effective business decisions. In this case, it would be better to have an individual account for each type of expense instead of one catch all account. This will not only help with budgeting and forecasting, but it will also help with providing your accountant with the correct information for your tax return.
Consider these points when deciding to create or update your chart of accounts:
A full renovation of your chart of accounts should only need to be done once. However, over time, you may need to update your accounts as your business evolves.
Do not start from scratch. You have all the data already and can leverage all current documents and reports to get through the process.
You are NOT alone. Contact your business adviser or accounting consultant to assist in this process. They have the time, expertise, and experience to make the process go smoothly.
Having a clean chart of accounts will pay big dividends in the future. There should be no reason to struggle to provide tax information, audit support, or financial statements.
Your business is an investment of your time, money, and sanity, so think about investing in cleaning up your chart of accounts because it will be well worth it!
If you have any questions, please contact us at 973.994.9400 or email@example.com.