#AskAcuity: When should we incorporate classes or departments instead of adding multiple categories to our chart of accounts?
A chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. It provides a way for businesses to classify all transactions according to the accounts they pertain to while providing useful historical data to forecast future trends.
We encourage our clients to keep things simple by thinking of their chart of accounts in terms of rows and columns. Rows make up a company’s account line items such as revenue, cost of sales, salaries, payroll taxes, rent, etc. Depending on the size of the company, a chart of accounts could include a few dozen to a few thousand accounts. When you’re ready to add some complexity to your financial statements, you can introduce columns.
There are multiple options for those looking to add columns/classes to their chart of accounts, depending on your specific business. Some people prefer to break down columns by department (R&D, Sales & Marketing, General Administrative, etc.). You could also classify columns by project. What’s the ultimate goal here?
A strategic, one-page income statement.
We at Acuity are huge proponents of one-page income statements. The whole point of a chart of accounts is to help your line of site to make better business decisions. Once you’ve added enough rows to spill onto a second page, it’s time to either: A) Reduce the number of rows or B) Consider the column/class system.
A few key indicators that it’s time to make the switch to class accounting:
- You’ve hired a manager that has a separate budget
- When your business opens additional physical locations but is still under one tax ID
- There are separate P&L responsibilities over certain sections of the business
- Your business has matured enough to have a budget for different groups
Pro Tip: Hesitant about removing rows from your chart of accounts? With the drill down capability of today’s accounting technologies ( like Xero and QuickBooks), there is no reason to worry about not capturing enough detail. There is always the option to dive deeper into details (by vendor, customer, month, quarter, etc.) at a later time.