How to Create a Better Chart of Accounts (Free Excel Template)

Can you make your way through a maze without a map—or with an extremely rudimentary one? Maybe. But if you have a map that is clear and detailed, getting to the end of the maze is going to be a quicker and more enjoyable experience. 

Trying to navigate your finances without a good Chart of Accounts (COA) is similar to this situation.

So many of our clients at Graphite (we are a startup accounting firm) come to us with a COA that is cluttered, disorganized, and either too simple, or too complex to interpret. It turns into something that they just go through the motions updating, rather than using as a tool to help them evaluate, plan, and stay organized.

What Is a Chart of Accounts?

A Chart of Accounts (COA) is a record of all of the financial accounts associated with a company. This list, typically housed in an accounting tool (like QBO) or spreadsheet, helps you track any money coming in and out of your company.  

The purpose of a Chart of Accounts is to help your team separate and analyze the way that your organization is bringing in and spending money. An accurate and well-planned COA gives you a clear understanding of your overall financial health and helps you make strategic decisions to drive further growth in your company. 

Additionally, this record supports your reporting processes that keep you compliant with tax standards and investor expectations. 

The Five Charts of Accounts

Typically, accounts are split into five separate categories:

• Assets – Resources owned by the company
• Liabilities – Debts or obligations
• Equity – Ownership interest of shareholders, including common stocks and retained earnings
• Revenue – Incoming payments for a company’s products or services
• Expenses – Costs incurred in generating revenue

   

The “QuickBooks Default” Doesn’t Cut It

Many organizations default to the basic Chart of Accounts format that we call the “QuickBooks Default” here at Graphite. Essentially, this is just a list of expenses outlined in alphabetical order. 

While this may fill a need for smaller teams with straightforward financial considerations, many startups quickly outgrow it. When your financial situation becomes more complicated—including hiring, investing in technology to help you grow, and bringing in VC funding—a need arises for a more complex solution. 

For most high-growth startups, you need your Chart of Accounts to support more in-depth financial analysis. 

The “QuickBooks Default” also doesn’t take into account any industry-specific considerations that may impact the success factors of your COA. 

Need help with bookkeeping?

How Do You Create a Chart of Accounts? 

If you’re making the leap from an overly simplistic or disorganized Chart of Accounts, it can be tricky to know what to include and what not to include. Our initial recommendation is to contact a firm like us to implement or refine your COA.

But if you plan on refining your COA yourself….in our experience, these next three considerations are the most crucial components of a COA that give you the best view of your organization’s financial health.

Keep It Simple

More is not always better. Charts of Accounts often fall short because they include too much information. This clutter makes it difficult to effectively analyze your data. 

The trick is to include all of the most relevant information and no more. We’d recommend dividing your COA into three categories:

• Revenue – All streams of income that your company has coming in. 
• COGS (Cost of goods sold) – Including labor, technology, cost of supplies, warehouse rent, etc. 
• OPEX (Operating expense) – All of the costs associated with running the day-to-day operations of your business, including rent, labor, insurance, office supplies, and marketing/advertising costs. 

Create an Effective Numbering Scheme

A numbering scheme is often a recommendation for a reliable COA, but this isn’t just to make it look nice. It’s a practical necessity to keep everything organized, make it easier to analyze, and minimize errors. 

Structure

The first step in creating a numbering scheme is to determine what the structure will be (i.e. how many digits will each account number have?). Most startups use 3-5 digits, but this can vary depending on the complexity of your organization and your finances. 

Categorization

For each category (i.e. revenue, COGS, OPEX) designate a starting number. For example, all revenue accounts will start with 4, all COGS with 5, and all OPEX with 6. 

For each subcategory within the broader categories, you’ll add the same second digit. For example, COGS labor would be 51000 and COGS non-labor costs would be 52000. If you have further categorization within the COGS labor category, their numbers would be 51100, 51200, etc. 

Essentially, more shared digits point to a more granular association. 

This number system takes the guesswork out of categorization. Associated numbers make it simpler to create subcategories that are easy to identify without having to visually organize data in a way that makes your COA unnecessarily complex. 

Ultimately, the numbering system gives you more opportunities to do more sophisticated analysis, more easily. 

Organize Your People Resources the Right Way

Your people are one of your greatest investments, and also one of your costliest investments. You want to be able to analyze the money you’re spending on labor to determine your future decisions. 

Separating People vs. Non-People

Within each of the three categories mentioned earlier, we recommend splitting your costs into people vs. non-people costs. 

The benefits of splitting out your expenses in this way include:

• The ability to compare your investments in personnel and non-personnel within and across categories
• More in-depth information for budgeting and forecasting
• Support in making decisions for cost control and reduction strategies
• Improved stakeholder/investor communication. 

Breaking Your People Down Into Categories

Take it one step further and split out your labor costs between departments to compare your investments in labor in different areas of the business. You might compare the salaries for product/tech vs. sales vs. operations, instead of grouping all labor. 

Not only does this enhance the benefits mentioned above, but it also helps you to demonstrate ROI. Maybe you want to demonstrate the effectiveness of your sales/marketing department, relative to your revenue. 

If you separate labor costs by department, it makes it easy to grab your total expenses for sales/marketing during a certain period, including labor and marketing spend, and hold them up against your MRR or ARR growth. 

Download a Chart of Accounts Example and Template

We went over a lot of changes you may need to make to your Chart of Accounts, so your head may be spinning a little. And you may not have the time or resources to make these changes yourself. 

And thankfully, you don’t have to. 

Here at Graphite, we put together a free downloadable Chart of Accounts example that takes into account all of these best practices. And we split it out by industry for even quicker time-to-value for you. 

If you’re ready to revamp your Chart of Accounts and immediately experience more actionable financial analyses, download our free template now.