Whenever we start working with a new client, the first thing we look at is their chart of accounts.
Why? Because the chart of accounts tells us in one glance how well (or poorly) the accounting system was designed, and how experienced (or clueless) the prior bookkeeper or accountant was.
If you don’t know what the chart of accounts is, it’s the list of all the accounts in your general ledger. Basically, it’s the backbone of your entire accounting system.
A well-designed chart of accounts is lean, clean, and easy to understand. Everything’s in the right order, the accounts are all properly named (in a way that anticipates both the financial statements and the tax return), and there’s nothing extraneous. It’s like looking at the kitchen of an experienced chef: everything’s been laid out with a sense of purpose, and you know the food’s going to be good just based on the environment.
In contrast, a bad chart of accounts is the exact opposite. It’s long and confusing, bogged down with unnecessary and incorrectly-named accounts, and it doesn’t jibe with the financial statements. We’ve seen plenty of these over the years, and they look like a bad plumbing job that was pieced together by three different contractors.
Anyway, the bottom line is that a well-designed chart of accounts saves tons of time and headaches because it’s user-friendly and helps you generate clean, owner-ready financial reports. And at the end of the day, that’s what you really want: a simple, straightforward accounting system that’s easy to work with and helps you get the numbers you need as efficiently as possible.