Four Ways to Keep a Clean Chart of Accounts
Introduction
As a leader in the MEP space, we take pride in every aspect of our business and so can you. One aspect of business that can be commonly overlooked are your accounting practices, particularly when it comes to the chart of accounts.
The goal of accounting is to provide relevant and accurate information, and the organization of your books all begins with the chart of accounts. If the use of your chart of accounts is unstructured, messy, or inconsistent, then creating and maintaining clean and accurate accounting records will prove futile. Here are four simple practices you can start doing today in your architectural firm to provide a cleaner chart of accounts and, in turn, better accounting.
Four Practices
1. Use the Proper I.D. Codes: A good chart of accounts utilizes account I.D.’s. Coding the accounts is typically done by assigning a four-digit number, between 1000 and 8999, to each account. The first digit of each number will indicate what type of account it is. It looks nice when each I.D. number is a multiple of five or ten; this also provides room for adding additional accounts in the future. Most accounting software will allow you to assign an account I.D. to every item on the chart of accounts, but if it does not, you will simply have to include it before the name of each item.
Subaccounts can be used to break out parent accounts for additional details. For example, if your utility expense account (the parent account) is coded 6500, then you could assign the electricity, gas, water, and dumpster expenses as 6510, 6520, 6530, and 6540 respectively. If your accounting software allows for subaccounts, it can show the total of all subaccounts on the parent level, while showing the breakout of sub-accounts below.
2. Show Account Numbers: Cash flow can hit a variety of accounts, including checking/saving accounts, credit cards, SBA/traditional loans, and investment accounts. While you may want to refer to such accounts by their name and type (i.e. “the Chase savings account” or “the payroll checking account”) it is a good practice to include the last four digits of the card or account number at the end of the name on the chart of accounts. This will help avoid confusion, especially when hiring new employees to work in your accounting department. This is critical if you have multiple accounts of the same type, (i.e. multiple saving or checking accounts), especially if they are at the same bank!
3. Rename and Mark Inactive: If you find items on your chart of accounts that have not been used in years, or at all, it is good practice to mark those inactive. Don’t worry, it’s easy to reactivate them if you end up needing them, but this will reduce the any unneeded clutter in the meantime. Before you inactivate it, rename it in such a way as to recognize that it has been marked inactive. Inactive, Obsolete, or Don’t Use are appropriate to add to the account name, and they will act as flags if these accounts end up appearing on your financial statements. Your accounting software may let you fully delete an account if it does not have any transactions in it, but inactivating it is usually the preferred method.
4. Document Guidelines for Coding: You may have a clear picture in your head on how to use the chart of accounts, but the best way to convey that vision is to write it down. As your accounting department grows and your employees change, they will have coding questions. Having a cheat sheet or reference for your coding guidelines is very helpful. Keep these updated as you add or remove accounts, or as the IRS changes tax rules. Be extra mindful of unique accounts for similar expenses, such as meals, tax-deductible meals, and partially tax-deductible meals.
Conclusion
These simple practices will make your financial statements look clean, precise, and professional. More importantly, your accounting will be more relevant and accurate. You may already have implemented some of these practices for you which you should be commended. If not, the best time to start is now. At Royal Engineering, we care about helping other AEC firms excel and would gladly provide additional guidance or discussion of this topic so feel free to reach out to us with any questions or thoughts on accounting best practices.
