How basic accounting helps with general ledger accounts
A well-organized Chart of Accounts (“COA”) is the foundation of a sound business financial system. When one is well structured, it facilitates meaningful financial reporting which is critical for sound budgeting, forecasting and actual results. Too much detail in a chart of accounts can result in ineffective reporting and coding confusion; too little detail hinders the ability to drill down to the cause of variances in a company’s results. Below are five simple steps to consider how to set up general ledger accounts.
- Discovery: This step is critical because it is the fact finding phase. Elements include needing to know the business processes, accounting structure, as well as primary ledgers for transactional entries. Knowing this information is critical in determining which accounts to include in the setup and how they should be logically organized. Additionally, during this phase it is critical to determine how much reporting detail will be required.
- Categories: Choose categories best suited for your type of business. For example current assets, current liabilities, equity, revenue, expenses, or cost of goods sold. The current asset category might include accounts receivable, fixed assets, inventory, or supplies. The current liabilities category could include accounts payable, payroll payables, and notes payable.
- Account Setup: It is best to do this in terms of function rather than specifics. For example, when setting up accounts for fixed assets you might want to use one account for all vehicles and another for equipment.
- Account Organization: The accounts should be organized in terms of liquidity. Usually the general practice is to start with cash accounts then receivables.
- Numbering System: Try to incorporate a numbering system for the COA. For example, number the cash accounts starting at 1000 and liabilities at 2000. This will cut down on the time it takes to identify and code transactions. The numbering can be expanded to include further segmentation and greater account detail. If segmentation is required then expand the numbering system to include divisions or departments, 1000-XX.
We hope you enjoyed the bookkeeping tips found in this article!
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