The end of the year is fast approaching and there’s no better time to take a hard look at your bookkeeping practices. A new year means a new opportunity for organization. This article will explain how to clean up your chart of accounts. 

What is the chart of accounts?

The chart of accounts (COA) is the list of financial accounts you use in the general ledger of your company. It’s a way to categorize all of your transactions.

Before you hired an accountant, you probably set up a short list of accounts in your accounting software. Some software does this automatically for you. Without a planned chart of accounts, you may have too few accounts that you are not able to make sensible financial reports that can guide your business decision-making.

On the other hand, you may have added more and more niche accounts as your service-based business grew. A cluttered and divisive chart of accounts will do you no better than no information at all.

Having a well organized COA helps you make quick business decisions, gives you a more accurate snapshot of your company’s financial standing, and makes it easy to generate financial statements come reporting time.

Account Types

The COA for small service-based businesses is typically broken down into four main categories of accounts: assets, liabilities, income, and expenses. 

• Assets: Assets are what your company owns. Current assets accounts often include cash, inventory, and accounts receivable. Fixed assets are things like cars, buildings, and machinery. 
• Liabilities: Liabilities are what your company owes. Current liabilities are debts that are paid off within one year, such as accounts payables, payroll taxes, and credit card balances. Long-term liabilities are paid over a longer period of time, such as mortgages and car notes.
• Income: Also called “revenue”, income is the result of your business activities. Income accounts include services income, professional fees, and commissions. 
• Expenses: Expenses are the costs your business incurs. These can include a large number of things: utilities, rent, materials, advertising, salaries, interest, etc. 

Numbering Your Accounts

Now that you have an understanding of what makes up your chart of accounts, it’s time to start organizing.

Start by coming up with your standard COA numbering system. This will be a system that assigns a code to each category and type of account. For small service-based businesses, accountants usually recommend 3 to 5 digit ranges of numbers for each type of account:

Account code XXX

• Assets: 100 – 199
• Liabilities: 200 – 299 
• Income: 300 – 399
• Expenses: 400 – 499

If you are a larger business with multiple locations, it may be worth your time to implement a multi-segment code. Instead of just the three digits above, add on a segment of numbers to indicate your various business locations:

Account code XX-XXX

• Location code (first set of 2 digits): 01-99 
• Account codes (last three digits): 
  • Assets: 100 – 199
  • Liabilities: 200 – 299 
  • Income: 300 – 399
  • Expenses: 400 – 499

Removing Duplicate Accounts

Now that each of your accounts has its own appropriate number, you can eradicate excess accounts. A common problem people run into when cleaning up their chart of accounts is duplicate accounts. For example, you purchased some office supplies but don’t see an “Office Supplies” account in your list to apply the transaction to. You go ahead and make the new account, only to realize a week later you had already made a “Supplies Expense” account. 

Go through and mark any accounts that may be duplicates. If all transactions are assigned to one account and the duplicate account has nothing in it, you can go ahead and delete the account. If both accounts have transactions, you can merge the accounts into one within your accounting software.

Retire Inactive Accounts

If your books were set up a long time ago by a past accountant, you probably have some accounts you no longer use. You may not offer a type of service any longer or don’t plan on spending any more money on a type of advertising. Don’t delete the account! Deleting the account may lead to the loss of historical information that you may need for financials later on down the road. Instead set the account to “inactive” to retain the information, but keep it off of your current books.

Create New Accounts

Once you’ve cleared your books of inactive and duplicate accounts, analyze your remaining transactions to see if your financial statements could use further narrowing. Adding a new account to further dissect your transactions can give you more detailed information about your spending and serviced-based business practices. 

Still slogging through those accounts? 

We hope this article on how to clean up your chart of accounts gave you some much needed insight. For those that need a little extra help, we offer a QuickBooks Clean Up service highly specialized to your business. If you don’t use QuickBooks – don’t fret! We can handle most accounting softwares and would be happy to streamline your books.