When designing a chart of accounts, there are several competing priorities that you need to manage:
- you need a way to maintain proper accounting records that are compliant with the accounting and tax regulations
- you need a way to quickly and efficiently enter accounting transactions
- you need a way to quickly and efficiently generate reports
- and you need a way to interpret accounting and financial data, understand the business, and support decision making
Remember the chart of accounts needs to support the business, not determine how the business operates.
How do you organize, name and number your accounts?
I prefer to always number each account. It makes it easier to organize and group accounts. It makes it easier to export the data to Excel and run calculations. If you are importing financial data, it is often easier to use account numbers rather than names for upload formats. And account names may change, but account numbers shouldn’t show the numbering will provide consistency.
The numbering can be as short as a 2 digit number (assuming you have more than 10 accounts) and I’ve seen numbers as long as 8 digits. Sometimes account numbers are even longer and broken up with a . or a – (something like XXXXXX.XX or XXXX-XXXX) to differentiate parent accounts from sub-accounts. However you decide to number, the best approach is to set the first number as the broad account classification “assets”, “liabilities”, “equity”, “revenue”, and “expenses”. And subsequent digits for sub-classifications and individual accounts.
I’ve also seen examples where the account suffix is used as a department, location, or cost center code. For a startup, I don’t recommend this approach as it is needlessly complex. If you need to track financial information along those dimensions, you should look for an accounting package that supports them as separate entry fields.
For a startup, I recommend a whole 4 digit number without suffixes. With the first digit used for the account classification and the second digit used for the sub-account classification. This leaves a 00-99 suffix for sub-accounts and even sub-sub accounts if you like and the individual entry accounts.
What Accounts Do I Need?
For a startup, I think the following is a good place to start:
1000-Assets
1100-Cash
1200-Accounts Receivable
1300-Inventory
1400-Prepaid Expenses and Deposits
1500-Purchases Returned Not Credited
1600-Fixed Assets
1610-Furniture (with sub-accounts for the asset and accumulated depreciation)
1620-Machinery (and continuing for other asset groups)
2000-Liabilities
2100-Accounts Payable
2200-Accruals
2500-Taxes Payable
2510-Sales Taxes Payable (with sub-accounts for each state)
2580-Payroll Taxes Withheld
2590-Income Taxes Payable
2600-Long Term Debt
3000-Equity
3100-Capital Contribution
3200-Retained Earnings
4000-Revenue
5000-Cost of Goods Sold
6000-Operating Expenses
6100-Sales and Marketing Expenses
6200-General and Administrative Expenses
6300-Other Overheads
6500-Non-Operating Income and Expense
6600-Profit Tax
You can use a lot of judgment on how you structure your sub-accounts, so long as they align well with the nature of the business and operations. And one more tip, make sure you use the hierarchy option on your chart of accounts so all the sub-accounts automatically roll up to the corresponding parent account.
Note: some larger, more complex businesses will have additional account classifications for non-operating income and expenses, gains/losses on asset sales, taxation, reclassifications, and adjusting entries. For a startup, these account classifications are usually overkill and can be grouped in the level 6000 accounts. Here is a link to an interesting article on the topic.
