Chart Of Accounts Best Practices Tips To Follow

 

QuickBooks is one of the greatest accounting software in modern times. Small and medium size industries usually use it to track the financial health of their organization. The accounting software is packed with some unique features like generating bills, payroll, keeping track of inventories, scheduling payments, and much more.

The charts of accounts in QuickBooks Desktop, commonly known as COA, is a tool that provides the complete array of every account in the accounting system. An account is a unique record that holds various transactions. In simple terms, Charts of Accounts provides you with a complete overview of what your company owes and what it owns. Charts of Accounts are one of the most crucial parts of streamlining the various accounts of your business. However, creating the charts of accounts is not always an easy task. If you are looking for the best practices to follow for generating the charts of accounts, then you are at the right place.

This article will try to summarize the best tips to follow while generating the charts of accounts for your business.

Charts of Accounts: Best Practice Tips to Follow

Charts of accounts make it easy for anyone to understand the financial structure of your business. The proper organization of financial statements helps in creating a structured COA. A well-defined COA ultimately helps in analyzing the profit and loss statement and balance sheet accounts in a proper way.

Follow the below-mentioned tips for creating well-structured Charts of Accounts in QuickBooks Desktop:

• Proper Categorization

The proper categorization of the accounts according to their types is very much crucial for a well-structured COA. The main accounts of the COA should allow easy extensibility. You must choose the main account according to the type of the account. The main account is further subcategorized. Always follow the parent-child structure for generating the charts of accounts on QuickBooks desktop.

• Use Simple Account Names

You may save your account report by whatever name you want. However, it is advisable that you should name the accounts more logically. Simple account names must be used so that anyone can understand what is inside the report.

• Proper Account Description

The chart of accounts must have a clear but short account description. The account description names are useful in finding the appropriate account when you need it for the latter stage. A proper account description must have the account name and account type.

• Wait for Deletion

Deletion of an account is very easy and quick. However, before deleting the account, you are advised to wait for the year's end or at least for the quarter. The rule is the same even for merging or renaming the account. Do not rename or merge the account in the middle, as it may create confusion resulting in extra complications.

• Be Consistent with COA

Always be consistent with your charts of accounts. Do not wait for a long time to add the values in your charts of accounts. If you spend too much time, then there is a high chance that you might lose the data. Also, spending too much time reconstructing the old account may result in mistakes or inaccurate data.

• Avoid Creating Unnecessary Accounts

The charts of accounts act as an index for the various transactions. To avoid unnecessary clutter in QuickBooks, you are advised not to create too many accounts for every transaction, sale, or utility. Be smart and accumulate similar entries in one account. Creating too many accounts may lead to unnecessary confusion and will lead to a painful cleaning process at the end of the year.

• Proper Reference Number

The correct account numbers are important in creating well-structured charts of accounts in QuickBooks. The COA numbering system follows the income statement and the balance sheet presentation. There is a valid reference number and a specific order for every account. In the COA, the balance accounts are listed first, followed by the income account.

• Assets Accounts – 1000s

• Liabilities Accounts – 2000s

• Equity – 3000s

• Revenue -4000s

• Expenses (COGS)-5000s

• Expenses (Operating Expenses)-6000s

The more breakthrough of the Assets and the liabilities accounts in a standard chart of accounts are mentioned below:

Reference Number	Assets (1000s)	Reference Number	Liabilities (2000s)
1200	Receivables	2100	Payables
1300	Inventories	2200	Accrued compensation & related items
1400	Prepaid expenses & other current assets	2300	Other accrued expenses
1500	Property plant & equipment	2500	Accrued taxes
1600	Accumulated depreciation & amortization	2600	Deferred taxes
1700	Non-current receivables	2700	Long-term debt
1800	Intercompany receivables	2800	Intercompany payables
1900	Other non-current assets	2900	Other non-current liabilities

Follow the Standard Accounts Guidelines

While creating the COA, it is advisable to follow the standard accounting guidelines. The Financial Accounting Standards Board, commonly known as FASB, establishes the Generally Accepted Accounting Principles (GAAP) guidelines. The accounting and financial reporting standards for non-profits and companies must be followed.

• Get Everyone Involved

Always try to involve everyone while creating the COA. Try to contact the other persons from another part of the business and listen to their needs and requirements.

• Beware of the Special Characters

While creating the financial reports, it is advisable to take care of the special characters. The financial reports may sometimes show you the error due to the use of special characters as they are disallowed in the reports.

• Logical Hierarchy of Sub Categories

While creating the subcategories, always keep in mind to follow the logical hierarchy. It is advisable that you should not go deep inside. The best practice is to go up to only three levels deep, while the first level is one of the main categories.

What is the Importance of Charts of Accounts?

Charts of Accounts play a crucial role in organizing the financial reports of small and medium-sized businesses. The charts of accounts must be created in such a way that it makes sense for each and every transaction and various accounts that you need.

As the charts of accounts in QuickBooks Desktop hold all your organization's financial data, it tracks down all the transactions. In simple words, it gives you a clear vision of the money flow in your company. The well-structured charts of accounts empower you to make the right decision for your company, which leads to exponential success.

Winding up

Charts of Accounts are an important part of drafting the financial reports of your organization. A good chart of accounts in QuickBooks is the foundation stone that is responsible for the company's growth. However, most of the companies ignore this foundation step and later land into confusion. Most companies set up their charts of accounts in QuickBooks only once a decade. Hence follow the best practices tips and craft incredible Charts of Accounts in QuickBooks Deskstop. Are you looking for more updates on QuickBooks? Do read our other blogs. Stay connected and stay updated.