Top 4 Best Practices for Chart of Accounts Design

It’s hard to find proven COA design best practices, because most finance and accounting professionals only do a redesign project once or twice in their career. Fortunately, we’ve been doing Chart of Accounts projects for decades and can share our experience with you here. 

Here Are Our Proven COA Design Best Practices

Best Practice #1: Begin with Analysis and Define Requirements

Designing a new Chart of Accounts requires a comprehensive requirements-based analysis before one can even begin to think about the new COA’s structure. Even designing one segment of a COA without thinking things through, vetting the requirements, and iterating around the initial concept leads to a messy chart later.

In order to define the requirements for a COA, there must be a structured approach including the review of all artifacts involved with financial data reporting. Materials to be reviewed include everything used in the reporting of financial data:

• Financial statements
• Trial balances
• Product and customer profitability reports
• Variance reports
• Responsibility reports
• Project reports
• Account analyses
• Spreadsheets allocation formulas

Pro Tip: Don’t limit the materials to just those that are in the financial reporting domain. Once the analysis has been completed, the COA design can begin.

Best Practice #2: Choose the Right Goals for Your COA Design

These are the four high level goals we believe are most important when redesigning your Chart of Accounts:

Data Quality: This is the most important goal of good COA design. It is very difficult to report financial information correctly unless the data is captured in a way to facilitate required reporting. Uniformity is essential to achieving high quality data, and it is, surprisingly, not a standard that is followed by many companies. 

For a COA to be uniform, a code must have the same meaning, code classification and usage across the enterprise. This helps to ensure that information can be reported easily in a standard way, without having to “fish” for balances in different places and then bring the information together in a patchwork fashion.

Efficiency: Your COA should be designed for users to code their financial transactions correctly. This means the account code must be easy for the user to determine and apply. This user friendly design helps prevent coding errors. The COA must also be flexible to accommodate expansion and changes to the business without requiring changes to the COA structure.

Reporting and Analysis: This is the output generated by using the COA coding structure. It needs to be designed to generate this reporting and analytical insights in final form. The COA should accommodate management’s reporting needs in all areas where financial information is required. 

This includes (but is not limited to):

• GAAP
• IFRS
• Product lines
• Projects
• Responsibility
• Forecasting
• Budgeting

Compliance: The COA should be designed for compliance requirements for regulatory and statutory reporting, eliminating the need for ad hoc reporting methods.

Best Practice #3: Create Uniformity with Your Chart of Accounts

Scalability and ease of use is ONLY possible when there is alignment across all areas of your COA (and any peripheral systems). Here are some best practices for creating a uniform system. 

• Your COA should be used by all the companies in the organization.
  If you are going to use a Data Warehouse, be sure to use the same chart as in the ERP system.
• Make sure the new COA is a uniform COA, meaning that account and organizational entity segments have the same meaning (i.e. are used uniformly) across all entities. This will allow management to know exactly what numbers comprise each report line across all entities.
• Ensure that the new COA can house all the information needed for Financial and Management Reporting, and that this information is organized in the same way that it needs to be reported. This will eliminate the need for information fishing, thereby facilitating the reconciliation process.

Best Practice #4: Improve the Entire COA Process and Ecosystem

• Set up a user group within Finance to oversee and maintain the integrity of the COA.
• Create and adopt a formal set of policies/procedures to request and approve new accounts (creating a form to use for these requests is helpful).
• Create automated interfaces to feed the general ledger whenever possible.
• Acquire a user-friendly multidimensional reporting tool like Cetova that can report directly off of your ERP system, such that non-technical end-users can become self-sufficient in developing and managing the reporting function.
• Implement an on-going monitoring mechanism, such as scheduling integrity reports, within the native ERP system to validate that Balance Sheets are balanced, and that inter-company balances and inter-corporate investments properly eliminate.
• Implement a mechanism (again, within the ERP) to automatically create elimination entries for inter-company balances and inter-corporate investments.
• Acquire a budgeting and planning tool that can maintain and write budgets back to the ERP system.
  
  

Bonus Tip: Successful COA Conversion Practices

Implementing the newly designed COA requires a comprehensive approach to converting the financial master data and all references to it, in the financial transactions and in the master and transactional data of non-financial modules.

Automated COA data conversion software and account-mapping tools make it much simpler to perform the COA conversion. This results in a database whose master and transactional data has been completely transformed to reflect the new elements of the financial master data. 

What’s the Upside of a Well Designed COA?

Besides making reporting MUCH easier, here are several other areas of immediate improvement.

Close Your Books Faster: Depending on the size of your organization, closing your books should take 3-10 days. If you’re currently spending weeks on this task and struggling to reconcile your entries, there’s often a COA problem hiding underneath.

Make Your People Happier: Accounting teams that no longer dread having to manage financial data are more productive and enthusiastic. Financial professionals want to spend more time analyzing data and less time compiling and entering data.

Avoid Unnecessary Layers of Tech: Because your accounting data is properly organized, you can forego procuring Data Warehouses for Financial and Management Reporting. Your financial data should be easy to query and manage.

You Will Save a LOT of Money: Designing a COA properly saves both time and money. For example, if you do spend on additional reporting tools (like Cetova), it will be because of the value they add with dashboarding and data insights, not because you can’t get at your data any other way.

Designing a Great Chart of Accounts Isn’t Easy, But It’s Possible

The integrity of master data (including your COA), is foundational to accurate management reporting and compliance. The key is to assess the entire process, over time and across company types, to enable a COA that is current and scalable. 

Not Sure Where to Start?

Contact our team to learn more about COA Design and Conversion.