“What’s in a Name?” Re-visit your Chart of Accounts
“What’s in a name?” As accountants, we have a counter argument for Shakespeare’s famous idiom. The names you give to your accounts, and in particular your sub-accounts, can be very valuable to your financial statements.
It’s all too comfortable to stick with the status quo when it comes to your financial statement sub-accounts (“sub-accounts” meaning the specific accounts under a standard line item, such as sub-account “IT & Computer expenses” under “Operating Expenses”).
A company may have used the same sub-account names for years and years while the company itself has greatly changed. Useless financial statement sub-accounts often linger because people are not sure what to do with them (e.g. “it’s always been that way”).
Team leaders should have thoughtful and periodic discussions about what kind of sub-accounts can best help the company evaluate its performance. Some helpful conversation starters are:
- Am I able to understand what all of these accounts mean based on the name?
- Are any names too long? Are any names too short?
- What is our ideal amount of sub-accounts? Are the financial statements too brief or are they too detailed?
- What are the top 3 accounts that we evaluate each month when we look at the statements? Do we need them to be more detailed?
For example, you may have an account named “Professional Fees.” However, if that account has various vendors, it may be helpful to break it out further. You may not easily see significant increases in fees from one type of firm if it is buried alongside payments you make to other professional firms that varied slightly during the period. Breaking out that “Professional Fees” account into more specific sub-accounts would provide better insight. Conversely, you may have too many sub-accounts, including some that are no longer relevant.
- When it comes to assigning sub-account names, try to provide a name that is informative. Ask yourself if an outsider would be able to generally understand what this sub-account is related to. Also avoid unnecessary length of the name. I would suggest generally no more than four words in a sub-account name.
- Be consistent. If you like to number your accounts, make sure all accounts and sub-accounts follow the pattern. Also, be consistent with your capitalization (i.e. either capitalize all words in an account name, or just the first word) if you’d like to give the financials a nice, uniform look.
Communication among the users of the financial statements is key to improvement. Periodic re-visiting of the chart of accounts is time well spent. It can ultimately help provide better financial information, which can help in making better business decisions. Make it a goal to evaluate them at least once a year…maybe over lunch!
Annie Frac, CPA