Why should a simple thing like our Chart of Accounts (COA) be the subject of any in depth discussion. Here’s why:
- Your COA is the foundation on which all financial reporting, planning and analysis will be based
- A ‘thin’ COA reduces key entry errors and correcting Journal Entries
- The larger the COA the more difficult future consolidations will become
As a member of The Institute of Finance & Management Controller’s Section, I found there are published articles regarding the impact of ‘messy’ COA’s on financial reporting. But to address the question this article poses, here are the ‘five reasons your Chart of Accounts may be out of control’ and why’:
- Anyone can create a new General Ledger account
- Anyone can change a General Ledger account
- Numerous acquisitions of companies with their own COA’s.
- Entities created within your company with the same G/L Account title but different G/L Account number
- Too many manual journal entries & post-closing entries
One of the most difficult and challenging aspects to cleaning up a Chart of Accounts is prior year histories. What will happen to them? Does your software provide a way to map G/L accounts to a consolidated financial statement? Where do you begin? Here are a few ‘suggestions’ to consider:
- Stop the bleeding! Restrict access to the creation of G/L Accounts to only a few people within the Finance/Accounting Department.
- Restrict access to entering Manual Journal Entries to only a few people within the Finance/Accounting Department.
- Involve your software vendor for your accounting system and have them assist you in developing a plan of action
- Involve your outside accounting firm in assisting you with cleaning up your COA.
- If available, implement the use of Sub-Ledger accounts that roll up to your main G/L Account (this provides further detail for financial and comparative analysis)
- From the day your software is installed and you receive training, continue learning and training to stay up-to-date on changes and upgrades.
The first step to solving the Chart of Accounts problem is to recognize that you have one. If you can relate to any of the five signs shown above it’s time to start laying the groundwork to fix it. But you cannot fix what is broken if you don’t have the tools or don’t understand how they work.
Do you have a story to tell about how you cleaned up your Chart of Accounts proliferation problem? Let me hear from you.