THE CHART OF ACCOUNTS IN THE US - PITFALLS

 Please note that the guidance below is not a substitute for professional legal and/or tax advice. Any tax advice contained in the body of this e-mail is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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The freedom to design a chart of accounts is not always a plus.  Problems include the following:

POOR IMPLEMENTATION
Entrepreneurs often leave the design of the chart of accounts to a bookkeeper, who will likely simply create a chart of accounts progressively as the need for new accounts arises. Although a good bookkeeper is a crucial asset to any business, even the best bookkeepers are rarely equipped to make the right decisions when it comes to developing a chart of accounts.

A chart of accounts should never arise on an account-by-account basis. The majority of accounts, whether or not they are needed in the short-run, should be created right from the start as a result of completely understanding the economic drivers of the business while keeping basic tax regulations in mind.

POOR CHANGE MANAGEMENT
Even after careful planning has been invested in the proper design of a chart of accounts, there is no guaranty that it will remain as such unless the evolution of the chart of accounts is carefully managed.

To that end, we recommend that bookkeepers not be given the ability to add new accounts. That ability, when left unchecked, leads to multiple permutations of the same accounts and does not provide for any brainstorming regarding the necessity and/or proper fit of each new account.

OVERLY COMPLEX DESIGN
Properly designing a chart of accounts is an art that can only come from experience and well-structured thought-process. Most poor designs can be attributed to lack of organization and an overly-ambitious desire to track everything.

Once exposed to the possibilities offered by a good accounting system, entrepreneurs often want to monitor every facet of every activity in their business. The chart of accounts or various other accounting system features (e.g. job-costing) will often be used to that end. However, inherent in the bookkeeping function are errors. Accordingly, relative simplicity will help minimize the potential for such errors.