Problems in Chart of Accounts Design

by Jim Wilkinson on July 24, 2013 in WikiCFO

See also:
Standard Chart of Accounts
Chart of Accounts (COA)
Complex COA Number for SGA Expenses
Example Chart of Accounts for Selling General and Administrative
Time Saving Tip for Filing Vendor Invoices

Problems in Chart of Accounts Design

Too many general ledger accounts

Often when using QuickBooks or Peachtree accounting software the number

of general ledger accounts grow over time. Usually the person entering the
data is not a trained accountant. When faced with an accounting entry that is
not specifically described by an existing general ledger account they will
often set up a new account. It is especially easy to do in QuickBooks.

Too much detail in Selling General and Administrative

Expenses
Similar to the problem mentioned above, often the person maintaining the
general ledger is a detail oriented employee. This trait is both a blessing and
a curse. The theory goes as follows: If a little detail is good then a lot is
better! In order to get more and more detail on the general ledger they set
up new general ledger accounts. In the end they are counting paperclips with
numerous accounts with less than a thousand dollars charged to them.

Not enough detail in Revenue and Cost of Goods Sold

Categories
Often revenue consists of one line item labeled Sales and Cost of Goods
Sold as another line item. On the other hand there is considerable detail in
Selling General and Administrative expenses. Most accountants manage
profitability by controlling costs, however, more value can be created by
managing above the line or gross margin.

Cost of Goods Sold not aligned with Revenue

It is not uncommon to see revenue sorted by product or category and the

Cost of Goods Sold being tracked under a different segregation. You should
sort revenue and Cost of Goods Sold by the same methodology so you can
manage gross profit by category.

No logic in assigning general ledger account numbers

Account numbers, especially in Selling General and Administrative expenses,
are not assigned in any logical order. Accounts are not entered alphabetically
or within a logical grouping. Consequently, it is difficult for the clerical staff
to code payables properly or consistently.

Poor titles on general ledger account descriptions

In some instances acronyms are used to title accounts making it difficult for
a reader of the financial statements to decipher the accounts.

Inadequate detail in Chart of Accounts

Too little detail in the chart of accounts can be as bad as having too much.
An example is having two inventory subsidiary ledgers posting to one
general ledger control account making reconciliation difficult.

No departments, product lines or regional data tracked

Part of a companys strategic plan should be to manage growth and
profitability by major categories. By putting this level of detail in the general
ledger managements focus can be targeted to strategic goals.

Chart of Accounts does not relate back to pricing model

In bidding jobs or quoting sales orders it is important to estimate indirect
overhead or direct overhead. If these estimates are not compared to actual
results then over time profitability may suffer.

Using the Chart of Accounts for job costing

In companies where job costing is important it is common to see the Chart of
Accounts used to track job cost. This is a result of not setting up the
accounting software properly or not purchasing the appropriate accounting
software package.

No standard Chart of Accounts for different companies

In this situation multiple companies are either formed or acquired over time.
Because they are often in different industries a different Chart of Accounts is
used for each company. It would be preferable to use a standard Chart of
Accounts customized in the few areas necessary.

Too many digits in chart of accounts numbering

Accountants trained in a large company environment often bring that same
logic to an entrepreneurial company. The result is an account numbering
system six or more digits long. Most modern day accounting software use
departmental accounting making the required digits to be no more than five.

Not using a numbering system

QuickBooks is great accounting software for beginners and non-accountants.
Consequently, the Chart of Accounts is established using an alpha system.
This practice makes it difficult to sort accounts in anything other than
alphabetical order.

Using alpha numeric chart of accounts

Another problem is using a combination of alpha/numeric accounts. Just as
using alpha only systems causes organization problems so does a
combination of alpha/numeric.

Not leaving gaps in the numbering system

When setting up a chart of accounts for the first time account numbers are
assigned sequentially. Later when you want to add an account in alphabetical
order there is not a gap in the numbering system to allow you to insert the
new account.
accounting
Percent-of-Sales Method
Process Costing

5 Responses to Problems in Chart of Accounts Design

1.
M Craig

September 3, 2014 at 3:36 pm #

Using alpha numeric chart of accounts

Another problem is using a combination of alpha/numeric accounts. Just as using

alpha only systems causes organization problems so does a combination of
alpha/numeric.
causes ???
Come on, guys. No apostrophe in the word causes.
REPLY

o
Olivia Durr

September 10, 2014 at 12:10 pm #

Wow great catch on that typo. Hope the article was useful otherwise. Im fixing
that typo now!
REPLY

2.
kaleab A

February 21, 2015 at 6:25 am #

how displayed execs digit number in peach-tree account in trail balance?

for example my entry data displayed in trail balance like this????????????????
so how come solve problem?
REPLY

3.
Chuck Tharp

June 28, 2015 at 8:04 am #

Good article, confirms that many of my concerns and difficulty , were normal.
Also your article helped formulate my solutions.
REPLY

4.
Tai Ben

November 21, 2015 at 1:03 am #

These seem to be general problems but for SMEs what structure will their chart of
accounts be.