2. Error#1: No Account Numbers
Alpha coded keys sort alphabetically
For small companies (and most companies start small)
QuickBooks is the most common accounting software
suitable for beginners and claiming for non-accountants.
This means sorting is in alphabetical order and does not
enable logical order
Unfortunately, the Chart of Accounts is encouraged as an
alpha coding system instead of number based system
Account numbering takes knowledge (of theory and
practice), experience (having done it before + familiarity
with the industry) and will not be as straightforward/simple
as you first think
3. Error#2: Too Many Accounts
“If you don’t know what to do with it, open a new account”
Often the number of GL accounts grows over time
.
When faced with an accounting entry that is not
specifically described by an existing general ledger
account, many times, the user just sets up a new account
Data may not be entered by anyone trained in accounting
4. Error#3: Too Much Detail
Many times I see Companies with hundreds (even
thousands) of Sales Accounts when they should be
performing the analysis in a Sales Module. The GL should
be orientated to Financial Statement presentation not
detailed management”
Analysis Paralysis
There should be a good reason for a GL account
1.Item is significant at the level one below the FS
2.Item is hard to control and requires ‘only’ items relevant
to the item
5. Error#4: Too Little Detail in
Revenue and COS
Aim to provide information
On the other hand there is considerable detail
in Selling General and Administrative expenses
‘Sales’ is probably not adequate to describe
Most accountants manage profitability by
controlling costs, however, more value can be
created by managing “above the line” or gross
margin
6. Error#5: Align definition of
Revenue with COS
‘COS’ by same segment
It is not uncommon to see revenue sorted by
product or category and the Cost of Goods
Sold being tracked under different segments.
‘Sales’ by segment
You should define and sort revenue and Cost
of Sales by the same methodology so the
reader can understand gross profit by category.
7. Error#6: Use a combination of Logical
and Sequential numbering in GL
1 Assets
2 Liabilities
3 Equity
4 Revenue
5 Costs
6 & 7 Overheads & Expenses
8 Allocations
9 Interest and Tax
There is a Generally Accepted Standard for
the first number in a series of Natural
Accounts
8. Error#6: Logical numbering in GL
Balance Sheet:
1000 Current Assets
1500 Fixed Assets
=
2000 Current Liabilities
2500 Long-term Liabilities
+
3000 Equity
Example:
9. Error#6: Logical numbering in GL
Income Statement:
4000 Revenue
5000 COS
= Gross Profit
6000 Overhead expenses
7000 Allocation accounts
8000 Finance costs
9000 Other Income & Exp
= Net Profit
Example:
10. Error#7: Abbreviations and Acronyms
In some instances acronyms are used to title accounts
making it difficult for a reader of the financial statements
to decipher the accounts.
There is no reason why not
- except that it should not be confusing
11. Error #8: Too little detail
– need for separate accounts
EG: Bank accounts always have their own GL account
It can aid control if an item is separated in
the GL
12. Error #9: Follow the Business Model
Use allocation accounts to assign amounts
to direct costs (cost centers) from indirect
costs
EG Rent to departments
13. Error #10: Do NOT Follow US GAAP
GAAP is for presentation that is a reporting
function
The COA needs to be for the purpose of
management
14. Error #11:
Segment the GL into Divisions
Use segmentation to reflect information that
is useful for decisions
15. Error #12:
Segments do not have to follow
‘logical’ coding
Can have a segment that is sequential
Example: 1234-9999
The second segment makes no pretense at using logical
coding
Default is 1234-0000 = no sub-accounts to the 1234 group
The segment just starts at 1 and increases
This adds to flexibility and does not detract from ease of
reporting
16. Error #13:
Use one Standard COA across all group
companies
This is not always an easy exercise
but it can be simplified
17. Error #14:
‘Other’ can be the default account
Use a 0 for the default when there is no
further breakdown/analysis in the GL
Example: 1200 Auto expenses
1200 Auto Expense Default
1201 Gas
1202 Auto Licenses
1203 Auto Insurance
18. One Last Thing:
The accrual system
A COA must be designed to handle accrual
accounting
The cash flow method does NOT reflect true
Profit/(Loss)
Be afraid – be very afraid
Be scared but go on – you will be glad you did
This presentation will open your eyes to possibilities
While I have read many books – probably all the major ones – on Excel I have never come across the material that is in this presentation.
For example:
Please note: There is one special characteristic about XL and other Office Apps that sets it apart from a program that you write. This is that things are not always what they might seem on the face of it. Functions in XL return results that are not expected but are predictable. By this I mean that XL often tests the data and returns a 0 or a 1 – alternately maybe a True or False. At first you might think that this is not a good thing – hold on – it is predictable so it can be used to extend the functionality of the functions that use it.
This presentation is probably based on the notion of zero’s and One’s and the concept that when we are interrogating data we can be looking at the value or we can be looking at some other property – like whether it exists (instead of what value it holds). So 0 & 1 can mean True or False.
There is also the concept of error handling to be dealt with.
For small companies (and most companies start small) QuickBooks is the most common accounting software,
suitable for beginners and claiming for non-accountants.
Unfortunately, the Chart of Accounts is encouraged as an alpha coding system instead of number based system.
This means sorting is in alphabetical order and does not enable logical order.
Account numbering takes knowledge (of theory and practice), experience (having done it before + familiarity with the industry) and will not be as straightforward/simple as you first think.
A controversial issue is the Prepaids and Accruals which usually require some reconciliation between a GL control and a Spreadsheet subledger. It is possible to argue either way – the separate GL account approach aids control but there are limits to this and a subledger may be needed.
A good technique is to set up Prepaids in AR as a separate class that uses a separate GL account and Accruals as part of AP (as a class of AP). An advantage of separate GL accounts for a prepaid is that the Controller can see at a glance at the TBal how much of the PPD is left.
Many times I see Companies with hundreds (even thousands) of Sales Accounts when they should be performing the analysis in a Sales Module. The GL should be orientated to Financial Statement presentation not detailed management.
There should be a good reason for a GL account
Item is significant at the level one below the FS
Item is hard to control and requires ‘only’ items relevant to the item
It is not uncommon to see revenue sorted by product or category and the Cost of Goods Sold being tracked under different segments.
You do not have to accept this standard chart but it is in common use this standard framework.
To assign a meaning to a digit is called logical coding. A common example is a vehicle VIN number – but you know how long they can be so it cannot be a completely logical code. At some stage a sequential number has to be used.
Example:
Cash in California Bank 10-1020-00
This might mean that the first segment ‘10 means California. The second segment is the Natural Account with the 1 designating Cash and the 2 meaning Wells Fargo. Usually a digit is added after the 2 so that you have the opportunity to add accounts in the future. Gaps in sequences are left for future allocations as well
The 3rd segment can be assigned to something else or it may just be a filler to enable future expansion
See separate discussion about designing a GL number system
Some companies use the 0 series for non-financial information – just to have a place in the GL to store statistics.
Numbers that start with a 0 can cause problems so most companies start at 1000
Of course we can discuss details and modifications to this basis framework – but you get the idea
Reconciliations are a way of life in the accounting dept but the control of certain items can be aided by the way they are accounted for in the GL
AR Classes should be separated
Example:
Retail Trade Accounts receivable
Wholesale customers
Employee receivables
Contra accounts should not be netted EG Provision for Bad Debts should have its own GL account
Of course – do this with intelligence and do not go mad over every little detail
Of course – do this with intelligence and do not go mad over every little detail
Of course – do this with intelligence and do not go mad over every little detail
Of course – do this with intelligence and do not go mad over every little detail
Segments in GL account numbers can aid the process
Example: 10-20-30-4567-890
Company-Division-Dept-NaturalAccount-Project/Location
This seems like a long number but because it divided into segments it is fairly easy to implement and entered through a 10keypad is fast since input masks do not require the – separator and each segment is a different list. While it may be too long for a small company, it is a good way to deal with complexity
Segments in GL account numbers can aid the process
Example: 10-20-30-4567-890
Company-Division-Dept-NaturalAccount-Project/Location
This seems like a long number but because it divided into segments it is fairly easy to implement and entered through a 10keypad is fast since input masks do not require the – separator and each segment is a different list. While it may be too long for a small company, it is a good way to deal with complexity
I have heard many accountants who say ‘Cash Flow is King’ and other such sayings that seem to be trendy or catchy
This is not true – although Cash Flow is a crucial in the short term it does not give a true reflection of PoL – people who say this have not gone to University or business school. All I can say is Call me if you have questions on this!