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.
In case you don’t know what the chart of accounts is: It’s the list of all the accounts in your general ledger. Accounts are listed by order of their appearance in the financial statements, starting with the Balance Sheet (Assets, Liabilities, and Equity) and continuing with the Income Statement (Income and Expense accounts).
So essentially, the chart of accounts is the backbone of your entire accounting and financial reporting system. And that means it’s pretty darn important.
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 sous 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. It’s like a bad plumbing job that was pieced together by three different contractors.
Long story short, a well-designed chart of accounts saves tons of time and headaches because it’s user-friendly and helps generate clean, easy-to-read financial reports. And at the end of the day, that’s what most business owners really want: a simple, straightforward accounting system that’s easy to work with and helps them get the numbers they need as efficiently as possible.