Purge Your Chart of Accounts.
Think of your chart of accounts as the backbone of your entire accounting infrastructure. If your millions of financial transactions are like printed photos, your chart of accounts is the photo albums that keep things organized.
90% of the chart of accounts I see are both too generic (resulted from the template chart of accounts provided by the company’s first accounting software) and over-complicated (resulted from after-thoughts and nice-to-have accounts that were never part of a bigger vision.) An easy way to keep things under wrap without a major overhaul is the annual purge of accounts that help keep the structure clean, lean, and mean.
5 steps to purge your chart of accounts
Prepare your profit & loss statement
Print out your profit & loss statement for on a monthly basis for the last 12 months. If your company does less than $10 million in revenue last year and your top-level profit & loss statement is longer than 1 page long – it’s a good sign that accounts need to be purged.
Look across the entire sheet
Are there any lines that are just straight 0s across the last 12 months? That means you haven’t used that account at all over the past year. Get rid of them.
Take a closer look at the column
Now, look down the column that shows your last 12 months total. Are there any line on this sheet with an amount less than $1000? Yes? Is there a specific reason why you need to see this number by itself at this level? If this number changes between $1 to $1000 -> would you do anything differently in your business? No? Purge.
By now, you should have really leaned out your chart of accounts and the reports are starting to clean up a lot. 2 more steps until we are done.
Remove 2 level deep chart of accounts
If your chart of accounts has sub-accounts, you shouldn’t go past 2 level deep. Yes, it’s possible, so don’t let your accountants tell you otherwise.
Clean Travel -> Travel – Lodging
Too Complex Travel -> Travel – Lodging -> Travel – Lodging – SPG Hotels
Print out and know your chart of accounts
5. Finally, print out your
newly modified better version of the chart of accounts and read through each account name. Identify everything that you either don’t understand what it means (dues & subscription,) sounds similar (travel – hotel vs. lodging,) or does not apply to your business (advertising accounting when you don’t do any advertising.) Work on grouping related accounts and merging similar accounts to avoid confusion. Purge any accounts that don’t belong.
There you have it. You now have a clean and mean chart of account that’s better than 90% of the accounts I see out there with agencies. Don’t worry about the newer and cleaner version – we can always add more accounts later if needed. But if you keep a good habit of reviewing your accounts on an annual basis – it’ll really help keep you focused on the metrics that really matter.
DeepSky works with entrepreneurs who own digital agencies or law firms to keep their chart of accounts clean and aligned with their business operations and goals all the time. Give us a shout if you have any questions.
See part 1 of our 2014 Accounting Spring Clean series where we talk about measuring what you want done in accounting.