APQC is currently in the middle of transitioning to a new ERP system. In my role as CFO, the most challenging part of this project by far has been cleaning up our chart of accounts as we make the move.
With more than 5,000 accounts, our chart of accounts has gotten incredibly bloated over the years. I would like to be able to claim that the problem was created by my predecessors, but frankly, this project is my first detailed look at the entire chart of accounts in the 15 months I have been here. A bloated chart of accounts still functions ─ just not very efficiently.
Having so many accounts for an organization of our size can create headaches for the finance team. It leads to more review time, more reconciliations, additional system maintenance, and greater chances for coding errors to occur (and risks that those errors go undetected). Having excess accounts is like having excess inventory ─ nothing good ever comes of it.
So, for this month’s metric, we’re examining the number of accounts in an organization’s chart of accounts. As a fundamental tool of accounting, the chart of accounts (COA) is a listing of the general ledger account names and identification numbers arranged in the order in which they customarily appear in financial statements. It can also include a description of what should be included in each account. The COA is a key accounting tool used for transaction processing, accounting activities, reconciliations, and financial reporting. It lies at the heart of double entry bookkeeping.
How did our chart of accounts get so bloated? It happens more easily than you might think. In the past, we often met ad hoc reporting requests by simply adding additional accounts, subaccounts, and project numbers to our COA without thinking through the consequences. Most systems are set up to easily add additional accounts to provide additional details. Managers often ask for more detail when their bosses ask them questions.
Since comparing numbers to the prior period is one of accounting’s key analysis techniques, we rarely eliminate any accounts. This bad habit allowed the number of accounts in our COA to proliferate quickly over the years. I can tell you from experience that trying to get ready for an independent audit when you have so many accounts in your COA is a headache that you don’t want (and it certainly does not add any value in serving customers).
In addressing this problem, I pulled data from APQC’s Open Standards Benchmarking General Accounting and Reporting survey, which shows that organizations in the 25th percentile have 200 or fewer accounts in their COA, while organizations in the 75th percentile have 860 or more (see above). While there is no precisely right or wrong answer in terms of how many accounts an organization should have in its COA, this metric provides some guidelines. The number of accounts needed for your organization will depend on considerations like the organization’s size, its level of complexity, the number of locations, and the activities at those locations.
While there’s no best-practice number of accounts for the COA, an oversized chart of accounts can make reporting, reconciliations, and accounting much more difficult than they need to be and ultimately adds to the process cost of general accounting. To avoid accounting problems down the road, organizations should work to make their COA as small and streamlined as possible.
Organizations frequently add accounts to their COA for reporting purposes, but oftentimes these additional details are more effectively tracked in a subsidiary ledger, such as the sales ledger or the accounts payable ledger. For example, a payroll ledger can be efficiently designed to track the detailed line items of individual personnel costs, including salaries, bonuses, and individual benefits. The detail ledger supports the human resources department charged with managing those costs. At the higher level, the summary-level costs can be charged at a person rate. From an operating perspective, managers decide the number of people they need, not the level of benefits each person receives.
While organizations are great at adding accounts to the COA, they need to get better at taking them away. Rather than waiting until a project requires COA cleanup, CFOs or controllers should perform periodic (at least annual) maintenance on the COA, eliminating inactive accounts as needed.
Accounts with little or no balance in them can be a sign that reduction and simplification are needed. For example, when I examined APQC’s accounts, I found around 4,500 of the 5,000 accounts in our COA had little activity and a balance of ten dollars or less. They may have initially been used to report performance on a new project or business line, but after some initial period they were no longer active. If a high percentage of the accounts in your COA have little activity or a low balance, you might have some streamlining and reduction to do.
A bloated chart of accounts can make for all sorts of problems, from increasing the process cost of general accounting to difficulty in reconciliations and reporting. While there’s no best-practice number of accounts for the COA, take it from me: Working toward a streamlined and simplified COA now will make for less frustration down the road.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.