What’s a Chart of Accounts? And how does coding drive your accounting?

Your Chart of Accounts is the driving force behind your organisation’s bookkeeping and  accounting systems. But what exactly is a Chart of Accounts, and how does it help to define and manage the ways in which you account for your business finances?

We’ve highlighted the key definition of a Chart of Accounts, with a clear explanation of how customising your account codes helps you get real control over your finances.

What is a Chart of Accounts?

Your ‘Chart of Accounts’ is the table of accounting codes that provides the structure against which all your financial transactions will be coded and recorded in your accounts.

It’s a list of predefined codes, which your accountant and finance team will use to record, codify and track every financial transaction that takes place in the business – making your bookkeeping more detailed and more effective.

What are nominal ledgers?

Bookkeeping is an essential part of running any business. Your books and accounts provide an important overview of the financial health of your company – allowing you to see what money has come into the business, and also what expenses have been incurred by the business.

To understand these flows of money in more detail, your accounts are broken down into nominal (or general) ledgers. These ledgers will include things like your assets, liabilities, sales income and operating expenses, with each nominal ledger having a particular set of accounting codes assigned to it.

How does accounting software code transactions?

Modern accounting software systems use a generic system of accounting codes to codify the various ledgers that make up your full accounts.

There’s a generally accepted coding convention across most different software platforms, allowing your accounts to be read and understood by any bookkeeper, accountant or finance professional – an approach that gives real consistency to your accounting.

For example:

Account type Number sequence
Assets 1,000 to 1,999
Liabilities 2,000 to 2,999
Income 4,000 to 4,999
Operating expenses 6,000 to 7,999

 

How does coding drive your accounting?

To fully understand what’s going on in your business accounts, it’s important to be able to drill down into specific ledgers – to know exactly what’s being spent on business expenses or operating overheads, or to see what percentage of your revenues are coming from specific products, or from specific branches of your company.

Think of your Chart of Accounts as a series of numbered pots, into which you put the money, or the receipts, for every transaction that takes place in the business. Effectively, those codes are the building blocks on which your accounts are built. By organising your income and your expenses in this systematic and organised way, you can very easily see how much income was generated from sales over a given period, or how much you spent on office rent in the past year – the figures you need are all there in each ledger ‘pot’, coded appropriately.

When managing cashflow for the business, this level of detail can be especially helpful. It allows a clear breakdown of every cash inflow and outflow within the business, giving you a granular view of your operating, investing and financing cashflows.

Why customise your Chart of Accounts?

Popular cloud accounting systems – like Xero, QuickBooks or Sage – all come with a standard Chart of Accounts, allowing you to code your transactions straight out of the box.

But there’s real value in customising your Chart of Accounts to create codes for every nominal ledger you’re running for the business – allowing you to create a bespoke Chart of Accounts that’s tailored to the exact financial needs of your organisation.

Working with an experienced accountant has many key benefits when customising your account codes. An accountant can advise you on steps to improve the financial success of the business, as well helping you to you customise your Chart of Accounts – setting up the most efficient financial blueprint for your bookkeeping, accounts and management reporting.

Some key advantages of creating a custom Chart of Accounts include:

  • Drilled-down view of costs and expenses – every cost has its own unique accounting code, making it easy to spot overspending and get proactive with cost reduction.
  • Increased visibility of sales performance – sales from each product, service and revenue stream can be tracked and measured, helping you understand performance.
  • Easy comparisons between branches – each branch, location or department can have its own cost centre, allowing you to see how each team is performing when it comes to sales, revenues and expenses etc.
  • Comprehensive cashflow statements – cash inflows and outflows are broken down in great detail, making cashflow management more insightful and effective.

A more detailed financial overview

At first glance, your Chart of Accounts may not seem like the most glamourous part of your finances. But, in reality, it provides a solid backbone to every element of your bookkeeping, accounting, reporting and business performance tracking.

To get a truly granular view of your organisation’s finances and cashflow, customise your Chart of Accounts and integrate your accounts with Fluidly’s smart cashflow engine to get detailed reporting and breakdowns of your cash inflows and outflows. Fluidly allows you to create cashflow forecasts powered by Artificial Intelligence in seconds using data from your cloud accounting software.