Your financial reports should provide the relevant information you need to make financial decisions. An analysis of your company’s Chart of Accounts should be done to compare these accounts with the data utilized in the report, so you have quick access to the information you need.
All accounting systems ultimately gather costs or revenues into buckets so that totals can be determined for tax returns, financial statements, or other reports. The bucket names come from the system’s Chart of Accounts. You may already have a cheat sheet of data you frequently use to manage your business.
Examples could include:
- Gross Profit per Product or Service
- Activity Center Profit/Loss
- Job Cost
The bucket totals plug into these reports to provide feedback to manage a specific product or service. Many accounting systems will allow buckets to be broken down even further by specific product or service names.
For example, Joe Contractor uses a Job Cost report to monitor the construction of the house he oversees at 123 Jones Street. His company’s Chart of Accounts has buckets for Sales, Direct Materials, Direct Labor, and Subcontractors. When amounts are coded into those accounts, his system allows for further identification by Job. These four accounts net out to the Gross Profit on this job. Gross profit divided by the Sales number gives a percentage called Gross Margin. Joe knows he must maintain at least a 30% Gross Margin to cover overhead such as office salaries, insurance, etc. This is how Joe manages his jobs.
The benefits of a well-organized Chart of Accounts include:
- Relevant data in buckets to plug into your reports
- Easy for staff to code costs or revenues into the accounts
- Easy to see fluctuations from period to period
- Automates the preparation of your reports with live data
Common segments in a Chart of Accounts
- Direct costs. These costs will fluctuate proportionately with the activity level. When sales go up, direct costs go up.
- Indirect costs. These might go up and down with activity level but not as sharply as the direct costs. Examples are equipment repair and vehicle fuel.
- Fixed expenses. These generally stay the same from period to period, such as building rent and utilities.
- Other income and expense. Some items will fall outside of a company’s operations, so they are generally segregated on reports, such as interest income and depreciation expense.
The refinement of the Chart of Accounts will start by understanding the information needed to manage your business. The result at the refinement’s end will be a well-planned Chart of Accounts which allows your management reports to be automated so you can focus on running your business and making well-informed financial decisions. After that, you can begin to look at Key Performance Indicators (KPIs), to begin impacting your future results. Check out our article on How to Improve Your Future Financial Results.
Darcee Ayers is a Tax Manager with 28 years of experience in the public accounting profession. Darcee specializes in exempt organization tax issues as-well-as trust and corporate taxation. She is currently a member of the Iowa Society of CPAs and the American Institute of Certified Public Accountants.