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Accountancy Best Practice

How to Implement a Standard Chart of Accounts Effectively

by Aziz Tayyebi

Executive Summary

A chart of accounts (COA), representing a unique set of codes to record all an entity’s transactions consistently, is a well-recognised, fundamental accounting need. Whether it concerns a complex organisation with numerous divisions, or an individual applying basic cash accounting, it is essential to be able to collate financial information that is relevant, both for internal management and external parties. This article considers some questions that management should take into account when implementing a standard COA, such as:

  • Why update a chart of accounts? An organisation may need to adopt a new COA if its industry or country adopts a new set of specific accounting standards. Furthermore, as organizations evolve, it is vital that the COA keeps pace and stays relevant to management.

  • What are the options when implementing a chart of accounts? Implementing a new COA can improve an existing system, or involve a completely new development. Management should take care to incorporate all useful accounts from older systems.

  • What are the practical consideration when designing a chart of accounts? Management must consider user needs, detailed design specifications, logistics, cost/benefit analysis, and legal requirements.

Introduction

A chart of accounts (COA) is essentially a set of codes for the consistent classification of financial information. This allows for the systematic production of decision-useful accounting information for management, such as budgeting, monitoring, and management reporting. Similarly, a standard COA helps to ensure comparability in external financial reporting.

The COA facilitates the recording of all transactions, which are filtered into a unique account code, based on certain criteria. While this criteria is influenced both by internal management needs as well as regulatory requirements, many common types of codes would always be expected, such as revenue, expenses, assets, liabilities, and equity.

Why Update a Chart of Accounts?

A standard COA represents an integral part of an overall financial information system. A COA takes inputs from source accounting documents and journal entries, and allocates that information to a prescribed set of accounts, ultimately producing financial reports, which in turn enable users of that information to track the performance of the business, in a format that best suits their needs.

External Decisions

COAs can change for a number of reasons, including an industry-wide move to standardize accounting terminology. An example of this was the development of a standard COA for not-for-profit organizations (NPOs) in Queensland, Australia. In 2002, Queensland University of Technology (QUT) and Queensland Treasury commenced a project to develop a standard COA for small NPOs that received government funding. The project was commissioned because, at the time, Australia did not provide specific national accounting standards for NPOs. As a result, there was tremendous inconsistency in accounting categories and terms required by government departments in their funding relationships with such organizations. Research from QUT indicated that these inconsistencies created a heavy compliance burden on NPOs when acquitting grants, with many additional costs being incurred in the reporting process . Thus, through an extensive consultation process, a standard COA was launched in Queensland in 2006 . The success of the COA, both for NPOs and the funders, through reducing simplification of the reporting process, increasing understanding, and consistency of accounting practices, led to other Australian jurisdictions subsequently commencing similar projects.1

A significant number of companies around the world have recently implemented International Financial Reporting Standards (IFRS). For many of those companies, the IFRS implementation was mandated in national legislation. The transition to IFRS involves significant practical and logistical challenges, especially in upgrading and adapting IT systems across the organization. A recent report by KPMG2 indicated that, “IT costs are generally over 50 per cent of the cost of IFRS conversion”, and that changes to the chart of accounts are inevitable.

Other key regulatory requirements, which can have an impact on the COA, revolve around taxation. For larger companies with overseas subsidiaries that will be using the same general ledger system, it is important to consider country-specific requirements when completing the COA, while providing as much consistency as possible.

Organizational Decisions

More commonly, businesses are likely to go through restructuring, make a strategic decision to implement a new IT system, or simply acknowledge that the current COA is not fulfilling the information needs of the business. Whatever the reasons are for change, management needs to assess both the new business requirements, as well as any that were not being met previously.

Similarly when considering the implementation of new reporting systems, it is essential to ensure that the individual components of the financial system, such as invoicing, stock management, and disbursements, are providing the appropriate support to the wider business objectives. This is often why ERM packages are so useful, as they allow information from a common source to be shared across previously disparate departments of the business.

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Further reading

Book:

  • Douglas A. Potter. The Automated Accounting Systems and Procedures Handbook. New York: Wiley, 1991.

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