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The word "Chart" may be a bit misleading and does not really help the learner much. A better term might be "Defined List of Accounts" or "Standardised List of Accounts".
So a Chart of Accounts is a list of accounts but not just any old list. The list of accounts represents what is considered to be the best for the type of business. There are many hundreds of accounts possible but only a few will be relevant to the business. For example, a football club is not likely to need an account for "Raw Materials" and a manufacturing firm is not likely to need an account for football program expenses.
A Chart of Accounts for each business, will consist of accounts for income, expenditure, assets, liabilities and ownership equity. These accounts are standardised and used on a regular basis and it is not a good idea to keep making additional accounts whenever it is difficult to categorise.
The number of accounts in the chart of accounts needs to be kept under control otherwise the process of simplification of information will not work.
This is a complex subject matter to try to explain, unless you already have had some accountancy training.
Let's start with a simple statement:
It is very important to have a Chart of Accounts which is appropriate to your organisation.
Because it is a difficult subject, here's a mind map of how this topic will be explained.
The diagram below is clickable for more information.
It is quite difficult to explain what a chart of accounts is, and what the effect is if it is not correctly set up.
Perhaps the best way to explain is by example.
Principles you need to consider
First Principle . .
In a business, even a sport and recreation business, there are vast numbers of financial transactions on a week-to-week basis. It is not possible to manage a business by looking at each and every transaction. Instead the accounting process summarises and simplifies information for the business manager (or management committee). The final step in the accounting process is a set of readable, understandable, and useful financial reports.
If no-one can understand the financial reports, then they are not useful.
Financial Statements should present information simply.
This is especially important when those who must read the financial statements do not have financial management training (as in a sporting club committee)
Second Principle . .
There is a delicate balance between having too much information in the financial reports and too little. Either way, the value of the financial reports is diminished to the manager or management committee.
The chart of accounts needs to be set up so as to provide the right amount of detail in the financial reports. Every business (sport and recreation organisation) will be different, and therefore there is no magic formula for a chart of accounts.
As a general rule though err on the side of using a simpler chart of accounts. Try to make it easy for the manager (management committee) to ready the financial reports.
Be cautious about adding
Sometimes it is necessary to add extra accounts
Third Principle . .
In setting up, or redesigning a chart of accounts for a business, you need to think about what information you really need.
For example, if you are running a football club which generates income from football programs and the bar and gaming machines in the clubhouse, the management committee are most likely to need information that tells them:
Think about the key information you will need to know how ell the business is going..
Streamline your chart of accounts so that you get key information you need
Let's look at a really bad example! This is a Chart of Accounts that went really wrong because the bookkeeper did not understand the principles.
Before you look at the example, you need to know what you are looking at! The document is a real life profit & Loss Statement produced for a club. Unfortunately the statement is five pages long and a complete mess as a result of not knowing how to set up and work with a Chart of Accounts.
Some of the things you might look for in this bad example are:
Now let's see how much better this same Profit and Loss Statement would have looked if a better Chart of Accounts had been followed
HTML Version of Profit and Loss Statement
Printer Friendly version of Profit and Loss Statement in PDF format
Basically, this version of the Profit and Loss statement is the same as the previous (bad) example but is much more concise in the number of accounts in the chart of accounts.
As a result, the report is easier to read and more useful as a management tool.
The suggested abbreviations may assist you in labeling columns in your journals.
|General Ledger Account||Comments|
|Accumulated Members Funds|
|Motor Vehicles at Cost|
|Office Equipment at Cost|
|Accumulated Depreciation on Motor Vehicles|
|Accumulated Depreciation on Office Equipment|
|PAYG Tax Withholding|
|Cost of Sales|
|Purchases of Clothing for Resale|
|Purchases of Equipment for Resale|
|Soccer Program Costs|
|Maintenance of Clubhouse|
|Maintenance of Fields and Tractor|
|Photocopier Lease Payment|
|Printing & Stationery|
|Purchases - Clothing|
|Purchases - Equipment|
|Travel & Accommodation|
|Soccer Program Revenue|
|Sales - Clothing||Use for any type of clothing sales|
|Sales - Equipment||Use for sales of footballs etc.|