Designing a chart of accounts

The chart of accounts is the list of every account the business posts to. It decides what questions the books can answer later. A cafe that records all its food and drink purchases in one account can never tell you its milk cost without going back through invoices. A chart with four hundred accounts for a three-person business produces trial balances nobody reads.

Numbers before names

Most charts number accounts in blocks that follow the order of the statements:

• 1000s: assets, from most liquid (cash) to least (equipment).
• 2000s: liabilities, current first.
• 3000s: equity.
• 4000s: revenue.
• 5000s: cost of goods sold or direct costs.
• 6000s and up: operating expenses, then other income and expense, then tax.

Leave gaps. Northside numbers its prepaid accounts 1300 and 1310 so that a prepaid software subscription can become 1320 without renumbering anything. Accounting software sorts by number, so a well-numbered chart produces statements in the right order with no extra work.

How much detail to carry

The test for a separate account is whether someone will make a decision or meet an obligation using that number on its own. Some examples from Northside:

Gift cards get their own liability account (2200) because the balance has to be tracked, and because IFRS 15 and ASC 606 both require the company to account for the unredeemed balance as a contract liability.

Counter sales and catering revenue are separate (4000 and 4100) because catering is sold on credit and has a different margin. The owners want to know whether catering is worth the trouble.

Card processing fees (6300) are separate from other bank charges because they move with sales and are worth negotiating.

Utilities, repairs, software and small supplies share one account (6200) for now. If any of them grows large enough to watch, it can be split out in a later year.

Detail needed only for analysis, such as sales by product or by hour of the day, belongs in the point-of-sale system's reports. Classes, locations, departments and tags in accounting software can split a single account without multiplying the chart.

Designing for the reports you need

Start from the outputs. A small business usually needs four:

1. Financial statements for the owners and the bank.
2. Tax filings. In Canada, a corporation reports its financial statement figures to the CRA on the T2 return using the General Index of Financial Information (GIFI), in which each line item has a code; for example, cash is 1001 and trade sales of goods and services is 8000. In the US, a corporation files Form 1120 and a sole proprietor files Schedule C.
3. Sales tax returns (GST/HST in Canada, state sales tax in the US), which need the tax collected and paid in separate liability and receivable accounts.
4. Whatever the lender's covenants measure.

Each account should map to exactly one line in each output. If you find yourself splitting one account's balance across two tax lines every year, split the account instead.

Normal balances as a control

Every account has a normal side (lesson 1.1). Recording the normal side in the chart gives you a quick check: an asset account with a credit balance or an expense account with a credit balance usually means a posting error. Cash with a credit balance means an overdraft, which should be reclassified as a liability for the balance sheet.

Changing the chart later

Add accounts freely at the start of a fiscal year. Avoid deleting or merging accounts mid-year, because it breaks comparisons with prior months. When an account is retired, make it inactive instead of deleting it, so historical entries keep their history. Record each change and the reason in a short log kept with the chart.