The Value Of A Chart of Accounts

Mar 07, 2016

How important is a chart of accounts? Does it matter what is in your chart of accounts? Does it make you more profitable or better at what you do? I am curious to hear your answers. I would tend to think some business owners would argue a chart of accounts is irrelevant and does not affect the profitability of your business. However, I say, not so fast!

Obviously, having a chart doesn’t necessarily add money to your pockets. However, correctly structuring your chart of accounts can aid in your profitability. Of course, there is more to it than just having the chart of accounts, it must be correctly utilized for optimum outcomes.

Having the essential accounts (i.e. direct costs and overhead accounts) and correctly managing them will provide you with invaluable information. For example, you are able to determine your gross margin and your profitability. With such data, you can make quality business decisions to improve or maintain your level of profitability. Without such accounts and without recording the appropriate information, it is impossible to have a handle on your gross profit.

In addition, utilizing a reasonably accurate chart of accounts can provide information from which to calculate many accounting ratios. These ratios can be used to benchmark your company in comparison with other businesses in the industry. As a result, improvements can be identified to ensure your business is competitive in your market.

Furthermore, an accurate chart of accounts can provide insight to be used for better decision making. Comparing your accounts over periods can help you identify and predict trends and downturns. You can be prepared to take the necessary actions to ensure you maintain or even enhance your profitability during periods of historical growth.

With that being said, I would caution against constantly modifying your chart of accounts. There may be times when you believe there is better information available which could be true. However, if you are regularly altering your accounts then you will lose the ability to analyze comparable data.

Next time you think it’s just a chart of accounts, think again!

Categories: Cost Accounting