Your Chart of Accounts defines the success of your MIS and statutory reports. A lot of repetitions of work can be avoided if the chart of accounts is rightly defined taking into account the precise business requirements.
In this post, we shall explore what are the essential aspects of the preparation of the Chart of Accounts.
“Chart of Accounts” Defined:-
A “Chart of Accounts” (COA) is a financial organizational configuration of accounting terms that provides a complete listing of every ledger in an accounting system. An account or ledger is a distinctive record for each type of asset, liability, equity, revenue or expense.
The common misconception that COA refers to primary accounting groups only, however in practice, it serves as the basis for a company’s financial and inventory record keeping structure.
The scope of the chart of accounts can be wide-ranging, as it covers the configuration of voucher types, accounting groups, ledgers, payroll, cost centers, stock groups, and inventory items.
Preparation Process – Summary:-
The first stage of development is to understand the business and statutory environment for which it is to be used. Potential MIS reporting requirements that the company may require has to be first written down, after that various options of the ledger, cost center, Inventory has to be explored, and finally, test run transactions should be implemented and checked with the objective with which COA was prepared.
Now, let us analyze detailed steps in the preparation of COA.
Business and Statutory Environment:-
No single chart can fit all types of businesses or enterprises. COA for Non-Profit Organization is different from that of a manufacturing unit. There are some organizations that have multiple branches. Further, legal reporting i.e. Annual account submission to Tax authorities, Banks, etc. also plays an essential role in deciding the structure of COA.
For inventory-based companies having manufacturing or trading gross profitability reports serves the first foundation of reports required and service organizations should focus on getting profitability either through the configuration of ledger grouping or cost centers.
The key to better MIS reports is a shorter and more organized chart of accounts, if there is a lengthy chart of accounts then financial reports may run on for multiple pages in printing. This makes the reports more difficult to read and connect.
Some of the guiding principles that can be followed are:-
- Ledgers created for different purposes for the same type of expenses should be put under the same groups. (E.g. Stationery-Special Events, Stationery-Winter Programs, and Stationery-Annual Report should be put under the group named stationery.)
- Instead of maintaining an account for electricity and an account for water, the use of one account can be called “Utilities”.
- The configuration of debtors/creditors can be aligned with the type of products dealing or with geographical locations where they are based.
- Fixed Asset Group should contain Ledger containing cost-wise addition and depreciation subgroup as well.
- ERPs provide for particular functionality for relevant groups only e.g. bank reconciliation facility would be available only if bank ledgers are grouped under the banking group.
If the accounts you need are thoughtfully organized, then the bookkeeping process is smooth, Entering transactions becomes more efficient since and you no longer have to find through many accounts to find the correct one.
Once the above is decided, it is necessary that sample transactions are posted and crosschecked the MIS generated with users and management. The type of MIS report can be a simple budget exercise done at the start of the year or complicated day-wise receivable management report.
Perhaps you may be new to the organization or setting up TallyPrime for the first time. Or perhaps you’ve been operating for a while and you realize your chart of accounts is a mess. You shall still need the above guiding principles to sort it out. We shall take up in the future how the chart of account is prepared in TallyPrime.
For further assistance, connect us at firstname.lastname@example.org