Whenever we start working with a new business, 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 knowledgeable (or inexperienced) the prior bookkeeper or accountant was.
Basically, the chart of accounts is the list of all the accounts in your general ledger. It’s the foundation for 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 exactly the opposite. It’s long and confusing, bogged down with nonsensical accounts, and it doesn’t jibe with the financial statements. It looks like a bad plumbing job that was pieced together by four different contractors.
Long story short, a well-organized chart of accounts saves tons of time because it’s user-friendly and helps generate clean, owner-ready financial reports. And at the end of the day, that’s what you really want: a compact, straightforward accounting system that’s easy to work with and helps you get the numbers you need as efficiently as possible.