How to Set up a Chart of Accounts and Keep Transactions Organized
Estimated Reading Time: 7 minutes
Build a better chart of accounts
Building a functional and effective chart of accounts is a core financial concern for any business.
But there’s no one-size-fits-all method for keeping things sane and organized, and at the end of the day, you really wouldn’t want it any other way.
Why? Accounting professionals understand that all businesses are different. Factoring in things like sales processes, capex and opex considerations, taxation, and industry regulations reveals a clear need for a tailored approach to setting up the chart of accounts.
They have to work for a real business’ needs in the real world.
That’s why it’s important for accountants and bookkeepers to spend a good deal of time working with business leaders to understand their model, all the while being careful not to shoehorn a business into a restrictive process while also adhering to generally accepted accounting principles (GAAP).
Instead of diving into every business use case, we’re going to take a generalized approach here that should give you some tips and best practice considerations for creating a chart of accounts that matches your clients’ needs.
How to create a chart of accounts
You know accounting like the back of your hand.
But what you may not know is how a particular business operates. Across industries, businesses small and large may have “overlapping fixed expenses, variable expenses, or revenues,” but that’s where the similarities end (Firm of the Future, 2022).
Some accounting firms walk their clients through a detailed onboarding experience to uncover situations that may require customization. This is really helpful as you’re building a compliant and functional accounting framework – you want to remove friction, increase visibility, and add insight to decision making processes. So if it’s not part of your process, consider adding this kind of discovery very early on to ensure the chart of accounts accurately reflects the business’ needs.
You’ll always need to customize, but here’s a basic process for creating a chart of accounts.
Conduct an initial client interview to learn how the business operates.
Document business processes.
Review any existing chart of accounts, noting areas where changes need to be made to better align with the business’ needs, and remember to think categorically in terms of revenue, expenditures, assets, and liabilities (Corporate Finance Institute, 2022).
Build a draft document that shows the existing chart of accounts, the changes you’d like to make, and the rationale behind these changes. If you’re starting from scratch, simply document the structure of the new chart of accounts. Make sure to include transaction categorization recommendations.
Ensure a CPA has reviewed the chart of accounts and your procedures for GAAP, tax compliance, etc.
Obtain client approval.
Create a project plan for making any required changes and communicate that to the client. Again, if you’re starting from scratch, communicating a go-live timeline would be in order.
Update or create the chart of accounts within the accounting software.
This is not an exhaustive list, but hopefully it gives you a head start on building your own process.
Processes make a big difference. Check out the Uncat Month End Close Checklist.
QuickBooks chart of accounts basics
Since QuickBooks Online is so popular, and so many accountants, bookkeepers, CPAs, and QuickBooks ProAdvisors alike have come to rely on this software regularly, it’s helpful to dive a little deeper here before moving on to transaction categorization.
Popular accounting software like QuickBooks Online often come equipped with a long list of standard account types. They may be activated automatically at setup, or you may have to manually turn some accounts on as needed. But remember, the goal is to set up a chart of accounts that’s aligned with the business, and if you leave several accounts open in your accounting software, they’ll continue to show up on financial reports even if they’re not being used.
That’s called friction, and we want to avoid it at all costs.
Here are a few quick reference items for QuickBooks:
Looking for the chart of accounts? Just go to “Bookkeeping” then “Chart of Accounts.”
All transactions typically affect two kinds of accounts in Quickbooks: an income/ expense account (like a bank account or credit card), and an account that includes information about why that transaction occurred.
Accounts use “types” to tell QuickBooks what to track - this is helpful to know if you’re not seeing an expense reflected in the chart of accounts, even if it’s properly categorized. Are you tracking a balance or transaction totals?
Uncategorized transactions can really throw a wrench in the works. Using a simple QuickBooks Integration with Uncat to automatically sync this information can take the headaches out of chasing down responses from your clients.
You can always add new accounts in QuickBooks - just make sure there’s a real business case for doing so.
Even if you’re a QuickBooks pro or you’re new to accounting software, it might help to get a lay of the land with this quick video:
More Resources: Check out this list of industry types from Firm of the Future for some pointers on setting up a chart of accounts for your client, and get some tips for building a small business chart of accounts here.
Making it work: how to assign transactions to accounts and categories
Before diving into the granular details of categorization, let’s zoom out. The two main building blocks of your general ledger should focus all of your work here: assets and liabilities.
Regardless of how many sub accounts you create and how many categories you use, keep in mind that they’re going to need to map to one side of the ledger or the other.
A healthy chart of accounts is crucial to generating and maintaining accurate and insightful financial statements, and those statements will also hinge on how well you’ve set up your accounts and how well you’re keeping track of categorization.
Reports are only as good as their inputs.
After you’ve spent time creating a fully-functional chart of accounts, the last thing you need is a myriad of uncategorized income and expenses messing up the works.
Here’s one way to keep things straight:
Make sure your team understands your client’s chart of accounts and the logic behind its creation.
Before running through monthly categorization and close activities for the first time, review all categories and ensure they align with the chart of accounts. Add, subtract, or reorganize as needed.
Create a method for properly categorizing your client’s transactions that show up in their accounting software (often you can create rules to automatically categorize income and expenses).
If the transaction is a sale, it should be categorized as income
If it’s a purchase, categorize it as an expense unless it’s a fixed asset
You can even mark an expense as billable if it’s tied to a sale
Make changes or add missing details as needed, and make sure to select a category that aligns with the logic of your chart of accounts.
Sidestep the hassle of exporting spreadsheets of uncategorized transactions by using Uncat.
Resource: Learn the basics of how to categorize transactions in QuickBooks with this video:
Save time and your sanity
You have enough on your plate.
Ready to stop herding cats? Fix uncategorized transactions with Uncat. Watch our free, on-demand demo, book a live call anytime, or start a free trial.
