Designing your Chart of Accounts
December 2024
Few organisations spend any time consciously looking at which income or expenditure accounts are useful to have, and which should be incorporated into another account. Whether something is ‘useful’ is driven by whether the information is actually needed or wanted for decision-making, accountability or another reason.
The whole point of categorising income and expenditure into accounts is to be able to track where your money goes, and where it comes from (or, in the case of a Balance Sheet, where it is.). These are core management information needs! The more categories are used, the less actual categorising is done – at one extreme each single transaction has its own account, and at the other everything is only classified by income, expenditure, asset or liability. Bookkeeping is the art of placing yourself at the optimal point in between these extremes.
A different level of detail is required for different functions within the organisation as well. People with management roles will need the most detail and will be best able to understand what each figure means. People in governance roles (committee, board) generally need the least detail, and are also least able to grasp the significance of any detail due to them being one or two steps removed from operations. A lot of time is wasted at governance level discussing relatively minor details in accounts because of it, while bigger issues may be ignored.
Too much detail causes the key information to be lost. Trends often only become visible when figures are aggregated to a higher level, for example overall administrative costs, cost of service provision, self-generated income or total income from grants.
Both Xero and MYOB allow detail to be aggregated for reporting. In Xero this involves some design work with lumping categories together in a report editor. MYOB allows accounts to be assigned to four different levels, and switching between detail and high-level reporting can be done with a couple of clicks at any time (provided the accounts are set up with this in mind).
Here’s some things to look out for when looking at a particular account:
- Do people confuse this account with another?
- Do people know what this account represents,e. what kind of transactions are in there?
- Is the account being consistently used, or do similar transactions often end up in different accounts?
- Are the balances in this account significant or quite small?
- Is the information needed separately? I.e. does the balance in this particular account tell you anything useful?
Accounts like ‘general’ or ‘miscellaneous’ are useful, provided they are not used for anything significant. It can also happen that accounts are too aggregated, and useful information hidden.
Once you’re happy with your accounts, it’s a good idea to create an accounts ‘map’ (or table), which explains which particular accounts should be used for which type of transaction. This ensures consistency and avoids the rather common situation where a bookkeeper changes and uses completely different accounts to the previous one.