Start with Default set of accounts: Most software’s will come with a default set of accounts. It is recommended that you use this as a starting point and improvise on it by way of re-coding and renaming, as it will save you the pain of re-creating and linking default Accounts like Payables, Receivables, Cash accounts & Bank accounts which are standard accounts needed by all businesses, big or small, and will be part of the default COA provided by the software. If you are using a manual system like excel spreadsheet then you may want to search over the internet for a default chart of accounts template that you can use with your spreadsheet programme.
Type of business: Your chart of accounts will vary hugely depending on the type of business. Some accounts may be required in a particular industry but may not be required in other industry. Like for instance Merchandise Inventory account may not be required in a service industry but is essential for a retail or a wholesale business. For service industries like accounting firm, rental agent and lawyers firm, all 3 would have multiple income tracking general ledgers. However the number of number of general ledgers could vary depending upon the number / types of services provided by them.
Type of Reports and information needed: Your reporting requirements will ultimately decide how you structure your COA. For instance most common accounting software's used in Australia have two separate general ledger (GL) for tracking GST collected on sales & GST on purchases. Because ATO requires every business to report GST collected on sales and purchases separately and hence it makes sense to track them using two different GL’s. Likewise how much revenue was generated by each type of service? Or each product? Or what was spent as part of office utility expense in previous month or year? Answers to these questions will help you determine the level of detail you need for your chart of accounts. If your business makes expenses that may attract FBT then you will need to incorporate special GL’s in your chart of accounts to facilitate FBT reporting.
More details means more input: The more detailed set of accounts you have the more options would be available for the end user when allocating income and costs and hence more input/information would be needed to the accounts function, whether the bookkeeping function is carried out in-house or external, which would mean allocating more time and budget for the accounts function.
Grouping Accounts: One of the most overlooked feature of modern accounting system is its ability to group accounts into one main group. This will give you the flexibility to look at the financials at macro levels and at detailed levels.
Numbering General Ledger in COA: It is essential to follow a logical numeric system while numbering General Ledgers and must be flexible enough to accommodate new GL’s as required.
Whilst it’s essential to have a detailed list of accounts to simplify reporting you need to weigh the cost and benefit to achieve this. If you are a fresh start-up or your business is just lifting off then it makes more sense to have a simple chart of accounts to start with and as your business matures the chart of accounts can be re-arranged over time. The ideal time to make these changes would be start of a new financial year or a budget year. However it must be noted any changes done at the COA level will only change your reports prospectively and will also deter comparison of trends between periods. So it’s very essential when you are setting up your chart of accounts you are being as prudent as possible.