Reviewing the Chart of Accounts
The chart of accounts (COA) is the financial information foundation of your entity.
Revenue and expense accounts make up the chart. Often the COA is an overlooked component of the financial structure. Ultimately it drives the ability of an organization to keep track of financial information effectively and efficiently. Therefore, it’s a critical component for those in the financial trenches to know and understand. Conduct a periodic review of the Chart of Accounts. Keep in mind the COA needs to be functional for your entity. Reviewing and revising is an ideal task to undertake during the maintenance season. During this process take a thoughtful approach about changes allowing for new accounts to be added.
The chart of accounts can be described in many ways. One analogy is of a grocery store. Grocery stores have aisles, shelves, and many other ways of storing goods. These goods are organized by type, refrigeration needs, etc. The chart of accounts functions similarly. Depending on the type of account and what it is used for will dictate the account number, description, and where it is located in your chart of accounts.
“One size doesn’t fit all.“
One size doesn’t fit all when structuring the chart of accounts. There are best practices to follow when reviewing, designing, and making the most of the COA. A guiding principle that you should follow is consistency. Consistency with numbering, describing, and structuring adds value and results in meaningful financial reports. Remember you play a role in painting a clear financial picture for your entity, and the COA assists with this.
The State of Washington has specific requirements for revenue and expense accounts. Check out the State Auditor’s Office (SAO) guidance on the chart of accounts. There are specific revenue and expense codes that must be used. These accounts can be sent out to a PDF or Excel. Make sure the requirements that they have set forth are followed. The SAO requires specific components of the revenue and expense accounts. The SAO can prescribe the first seven digits, also known as the BAS, EL, and OB codes. The specific mandatory components of each account are variable. The SAO does not prescribe the final digits, also known as the LA code. The current account structure may dictate how the LA code is used. Try working the fund number into the account code to aid in the selection of the correct account.
“Always be consistent.”
Always be consistent when describing accounts. For example, when describing payroll, I like the first word to describe the group the cost applies to (i.e., Administration, Operations, Volunteers, etc.). The second word describes whether the item is a wage or benefit (i.e., Administration Wages, Administration Taxes). By using a similar method, revenues and expenses can be clearly and consistently defined. Remember to pick a method and stick with it. If your current COA descriptions are not consistent, go through and develop a system that helps paint a clear financial picture for your entity. In the account export from the SAO, there are account descriptions provided to help get you started.
Also, take into consideration how many accounts are being used. Accounts that have minimal balances or zero balances should be combined with other accounts if possible. For example, if your current COA has seven different accounts for payroll taxes and benefits try condensing these down into three accounts. I would recommend using an account for taxes, insurance, and retirement. Strive to have material amounts in each account. The SAO may have specific guidance on the use of certain accounts, make sure you follow their advice.
A large chart of accounts does have drawbacks. If there are too many accounts to pick from, the wrong one may be selected. It may not be time efficient if the number of accounts available to choose from takes additional time to choose the correct account. Finally, if the COA of accounts is lengthy, there may need to be additional training on proper use. A chart of accounts that is too big may be cumbersome and confusing. A COA that is too small results in holes in the financial information. You want it to be just right allowing for the presentation of clear financial information.
Decision makers need meaningful information that can be deciphered. If it is challenging for you to interpret the financial information of your entity, then it will be challenging for an elected official as well. Consider presenting financial data to elected officials in a consolidated manner. Provide them with a high-level overview of fund balances and financial position. Then go into more detail in areas they have questions. Elected officials need to know and understand the big picture and have useful information to make decisions.
When revamping your chart of accounts keep in mind different accounts may be needed depending on the size of your entity, type of entity, and tracking requirements. If your current chart of accounts is too cumbersome now is the time to redo it. Make the most of your time, YOU CAN DO IT! I believe in you! Check in next week as we roll up our sleeves and get further into maintenance season.