CHART OF ACCOUNTS. THE FOUNDATION NEEDED FOR YOUR BUSINESS TO SUCCEED AND GROW.

A business chart of accounts (otherwise known as a general ledger) is key to a successful foundation for the business. Having a chart of accounts that is too small can restrict a company’s growth potential. Having a chart of accounts that is too large can make it very unwieldy. In this article, we will discuss ways to optimize your chart of accounts to allow your company to grow but at the same time not become overwhelming. While it is recommended that you modify your chart of accounts before a major event, such as an acquisition or a new ERP implementation, you can update your chart of accounts at any point you wish. We would recommend that any changes to your chart of accounts are discussed with your outside accounting firm.

For discussion, we will be using a fictitious 6 C-store/ gas station chain called ABC Food Mart. ABC Food Mart is a 6 C-store/ gas station chain located in Massachusetts. They have separate business checking accounts for each of their C-store locations for deposits. They also have separate bank accounts for their lottery transactions. Finally, ABC Food Mart has several corporate bank accounts that handle their payroll, Accounts Payable, and money market functions.

In setting up their chart of accounts, we first look at their main account structure. You want to make sure you limit using sequential numbers that would not allow growth to occur. For ABC Food Mart, they had this as their original chart of accounts for a sample of their cash accounts:

• 10000   ABC Food Mart checking account

• 10001   ABC Food Mart Accounts Payable

• 10002   ABC Food Mart Money Market Account

• 10011   Store #11 checking account

• 10012   Store #12 checking account

• 10013   Store #13 checking account

• 10111   Store #11 Lottery

• 10112   Store #12 Lottery

• 10113   Store #13 Lottery

While this system works when a business has a small number of locations, it will become more unwieldy the more locations that the company has. To make this chart of accounts more manageable, the first step is to add what is known as a segment to the chart of accounts. A segment allows you to add items, like locations, without the need to add additional accounts. Using the above example, adding a location segment would result in the following:

• 001-10000          ABC Food Mart checking account

• 001-10001          ABC Food Mart Accounts Payable

• 001-10002          ABC Food Mart Money Market Account

• 011-10000          Store #11 checking account

• 012-10000          Store #12 checking account

• 013-10000          Store #13 checking account

• 011-10100          Store #11 Lottery

• 012-10100          Store #12 Lottery

• 013-10100          Store #13 Lottery

In this example, you will see all the checking accounts now have a main account number of 10000 and a segment that corresponds to the store number, except for the corporate account, which we put as 001 in this example. So, if ABC Food Mart adds additional stores and checking accounts, they will not need to add additional main accounts to their chart of accounts. Instead, they will just have to add the new location to the existing account of 10000. Also in this example, you can see we moved the main lottery cash account to 10100 to allow plenty of room for growth should there be a need for additional types of bank accounts.

Which brings us to another problem we see with chart of accounts, the inability to add accounts next to existing accounts for better grouping of like items. Here is an example with ABC Food Mart:

• 60040   Store Supplies

• 60041   Corporate Supplies

• 60042   Postage

• 60043   Utilities

• 60044   Telephone

• 60045   Cleaning

• 60046   Insurance

• 60047   Rent

• 60048   Real Estate Taxes

If ABC Food Mart wanted to breakout Utilities by the type of utility (gas, water, electric), they would have to add their additional account numbers to the last number used instead of keeping it closer to the original utilities account. If they set up their chart of accounts like the following, you will see more room for growth:

• SSS-60040 Store Supplies (SSS meaning the store segment)

• 001-60040     Corporate Supplies

• 001-60050     Postage

• SSS-60060    Utilities

• SSS-60063    Utilities – Gas

• SSS-60065    Utilities – Electric

• SSS-60067    Utilities – Water/ Sewer

• SSS-60070    Telephone

• SSS-60073    Internet/ WAN

• SSS-60080   Cleaning

• 001-60090    Insurance

• SSS-60100    Rent

• SSS-60110    Real Estate Taxes

As you can see, while using consecutive numbers for a company’s main general ledger accounts may be simple, it does cause issues when you grow your business. Spacing out your chart of accounts allows you to grow your business while keeping everything together. Using segments for locations will make it easier for your accounting staff as they will only have to remember one main account number (10000) and then the store number (011) to know that this is the checking account for store 011. This is especially helpful when you hire and train new staff.

We hope this discussion on growth and your chart of accounts will be helpful to your business. Should you need assistance in reviewing your chart of accounts, please reach out to ROG Consulting.