Six tips for optimizing your chart of accounts

Your chart of accounts directly impacts your ability to track, analyze, and report financial data effectively.

Follow these key principles to build a COA that delivers valuable insights for your business.

How to optimize your chart of accounts

Whether you're looking to refine an existing system or build one from the ground up, these recommendations will steer you toward a streamlined, functional, and insightful COA.

1. Keep it simple

Use only the accounts you need. Reducing the quantity of categories will make it easier to code, read, and audit. Accounts that don’t get used often, or that have relatively small transactions should perhaps be combined into another account. On the balance sheet, support the balances with underlying schedules rather than create separate accounts for similar transactions. On the P&L, use multidimensionality rather than duplicating accounts (see section 6).

Here are a few questions to ask to help keep things simple:

• What information is required for internal reporting (management, department reports, etc.)
• What information is required for external reporting? (taxes, audits, compliance, etc.)
• Will this account get used enough to be worth it?
• Is the account naming clear enough that non-accountants will understand?
• Can we reduce some accounts by maintaining separate supporting details?

2. Use account numbering

Using account numbers keeps order and helps identify what type of account it is. Unless account numbers are used, the system defaults to alphabetical order which may not produce the most relevant information on top. Also, the account numbering system helps identify account types: assets, liabilities, equity, sales, cost of sales, expenses, and other expenses.

10000 - Current Assets

20000 - Long-Term Assets

30000 - Current Liabilities

40000 - Long-Term Liabilities

50000 - Equity

60000 - Revenue

70000 - Cost of Sales

80000 - SG&A Expenses

90000 - Other Income/Expense

Give yourself space when starting so you can add more accounts later on and still keep the order you would like.

3. Use sub-accounts

Grouping like-kind accounts into sub-categories and ordering the accounts from largest to smallest (the best you can) produce more relevant information.

81100 - Advertising & Marketing

81105 - Ad Spend $500,000

81110 - Public Relations $175,000

81115 - Content Creation $125,000

81120 - Affiliate Payments $75,000

Total 81100 - Advertising & Marketing $875,000

4. Align with reporting requirements

When the COA is aligned with reporting needs, it is easier to obtain relevant information. Consider what is important for internal reporting (management reports, forecasts) and external reporting (banking, tax). As much as is helpful, separate fixed expenses from variable expenses. Consider what separations in revenue may be most helpful to include on the GL (channel, product, geography, customer).

5. Keep coding consistent

Choose a code and stick with it. There are many instances where a transaction could be appropriately coded to multiple codes. Pick one, and continue coding it there. This will help with account analysis, forecasting that account, and comparing the forecast to actuals.

6. Use multidimensionality

Multidimensionality refers to the levels of data collected in each transaction. It can reduce the number of accounts while maintaining the ability to see data however desired. Examples of multidimensional data include product, quantity, location, customer, vendor, department, sales and cost per unit, project, event, and so on.

It’s common to see a COA that duplicates codes for departmental reporting. This increases the likelihood of coding errors and requires the financial user to add up account values to understand the full cost of an account type. Instead, using Class Categories (QBO or Tracking Categories (Xero) can provide departmental reporting without complicating the COA.

The common thread among each of the steps listed is simplicity. As companies grow, the COA may experience changes. These best practices will help maintain simplicity along the way and will produce valuable results.

Bonus tip: Use Ramp to automate your accounting

Step 1: Connect Ramp to your Accounting Provider

Connect Ramp to your accounting system, and we'll fetch essential data like your chart of accounts for precise spend classification.

Step 2: Configure the default accounts for your company

Select the accounts from your accounting provider that Ramp will use for posting transaction information.

Step 3: Select the fields for your spend

Every business has its own way of categorizing spending. Ramp imports accounting fields from your provider, letting you decide which ones to use for financial transactions.

Step 4: Automate your Accounting

Automate transaction classification by setting rules based on merchant details and card information.

Step 5: Start coding transactions

Find all transactions in Ramp's 'Accounting' tab for your review and categorization. Check out our Accounting Rules & Automation for more on on automation.

Step 6: Sync transactions to your Accounting Provider

With a click, sync transactions like credit card charges and reimbursements to your accounting system.