From an accounting standpoint, effective recordkeeping begins by capturing financial transactions in the general ledger (GL). But entering these details is only part of the battle. It’s the chart of accounts (CoA) that gives the general ledger structure. Otherwise, it would simply be a long list of transactions with no indication of how they relate to financial results. The CoA avoids this confusing setup by providing a way to group transactions based on how they impact the business. For instance, we use the CoA to classify a transaction as revenue or an expense, or to calculate the value of a company's assets, liabilities and shareholder equity.
If grouping transactions by type, such as asset, liability, equity, revenue or expense, were all that was required of the chart of accounts, keeping everything organized wouldn't be difficult. Most companies could manage with a few dozen accounts.
But companies rarely limit themselves to this straightforward structure.
Complex Account Codes
Problems arise when a chart of accounts expands beyond its original function. In addition to tracking revenue, expenses and other financial data for the business as a whole, many companies choose to track on an operational level as well. To do this, they add extra characters to the account code structure, increasing the number of accounts in the COA. And as companies evolve, they often want to track financial data at an even more granular level. This further complicates the account code structure and increases the size of the CoA exponentially until what started out at 40 or 50 basic accounts codes becomes hundreds or thousands.
The number of accounts codes a company requires depends on how they're organized and what the business wants to track. A firm could easily have a couple of hundred account codes, especially if it has multiple locations. A large enterprise could have thousands.
Say a company opens a second warehouse and wants to track revenue, expenses and assets by location. It will need to add a location ID to its account code structure. This would double the size of its chart of accounts
Your accounting software shouldn't force you to use more codes than necessary because over time, as the chart of accounts gets denser, deciding where a transaction belongs becomes difficult. Coding errors occur more often, teams spend excessive time correcting journal errors and producing accurate financial statements gets harder. The result is a longer close process and more overtime.
The complexity of the chart of accounts also affects the ability of the accounting team to perform one of its most important duties — closing the books and producing accurate financial statements. Accounting staff wind up spending an excessive amount of time identifying and correcting errors, which keeps them from focusing on other tasks. These delays can have serious consequences. Timely reporting is essential for effective management and to keep stakeholders up-to-date on the performance of the business.
Delayed or inaccurate reports are often a sign of trouble and can hurt efforts to secure a loan or other financing.
Simplify Your Chart of Accounts with NetSuite
A complicated chart of accounts increases the risk of transaction coding errors, creates more work for accounting staff and may affect the quality of financial reports. That could lead to costly fines or other penalties. NetSuite simplifies the chart of accounts(opens in new tab), eliminating the need to create long, complicated account codes for operational reporting.
NetSuite’s multidimensional structure allows companies to combine operational, statistical and financial data at the transaction level, creating virtually unlimited tracking and reporting options without adding complexity to the CoA. With NetSuite, you can:
- Track costs by department, region, business unit or other operating segment.
- Identify sales trends by monitoring revenue by product, location and margin.
- Identify your best customers not only by how much revenue they represent, but also by how much profit their business generates.
- Customize account formats, transaction details, GL impacts and more.
No more struggling with a predefined, one-size-fits-all chart of accounts structure that doesn't work for your business. With NetSuite, your reporting and analysis options are almost limitless.
Watch our recent webinar(opens in new tab) to learn more about simplifying your chart of accounts with NetSuite.