Avoid the Chart of Accounts Drift

  1. It is a common and frustrating experience.

    1. You set up a Chart of Accounts with all the "normal" accounts such as
      1. Sales
      2. Repairs & Maintenance
      3. Utilities
      4. Supplies
      5. Interest Expense
      6. and so forth.
    2. A year later you come back and find a whole host of new useless and confusing accounts with names like
      1. Bank Payments
      2. Petty Cash
      3. BRTX
      4. Payments to Liz
      6. walmart
      7. extra
      8. TRANSFERS
      9. hardware stores
      10. and on and on and on
    3. It is bad for several reasons:
      1. It looks amateurish to a bank to whom you want to make a good impression.
      2. Your accountant cannot use information that is this highly corrupted.
      3. In order for the information to be usable, you must spend hours of time going back over the bad accounts.

  2. Guidelines

    1. Avoid all upper case and all lower case spellings. Do not write SUPPLIES on one line and utilities on the next. It looks bad.
    2. Do not use abbreviations. Write out "Utilities" instead of abbreviating to "Util."
    3. Do not use terms that only you know what is meant. "DSCXX Charges" might means something to you, perhaps "Discover Card Exchange Fees." Even that is meaningless to a third party. What you mean is "Credit Card Fees."
    4. Add new account names sparingly, rarely, and only when truly necessary.
      1. You already have an account for Supplies.
      2. You write a check for $210.50 payable to Greenbaum Inks to pay for new ink cartridges for the copier.
      3. Charge the $210.50 to Supplies.
      4. Do not create a new account such as
        1. Ink Cartridges
        2. Copier
        3. Copier Supplies
        4. Greenbaum Inks
    5. Do not even think about creating an account called:
      1. Petty Cash
      2. Expense Reimbursements
      3. Miscellaneous Expenses
    6. Petty Cash is not an expense. It is a cash lockbox. See separate article about using a petty cash account.
    7. "Reimbursements" means nothing. For example, if you write a check for $150.40 to George Chanis to reimburse him for some supplies he stopped by at Office Depot to buy for you, then charge he check to "Supplies." Do not create an account called "Reimbursements" or "George Chanis."
    8. Too often someone creates a new account which is a description of what was done rather than what category should this be charged to. For example, if you call a plumber to fix the toilet and he charges you $75.00, then charge that $75.00 to Maintenance & Repairs. Do not create a new account called "Toilet," "Plumber," or "Fixed Toilet."
    9. Although it is an acceptable expense name, do not charge anything to "Miscellaneous Expenses." The problem with Miscellaneous Expenses is that one tends to throw too many things into Miscellaneous Expenses.
    10. For example, let's say that you spend $10.00 for plastic cups, name plates, and markers for a meeting. Do not charge this to Miscellaneous. Decide which account do you have which comes closest to this expense. Charge it instead to Supplies.
    11. Never charge an expense to a person's name or a company's name. If it is for supplies purchased at WalMart, charge it to Supplies. If it is for repairs done by Albert Twostone, then charge it to Repairs & Maintenance.

  3. Use Split Entries

    1. Learn how to use split entries.
    2. For example, you write a check for $230.00 to Andrew Tremont to reimburse him for the following:
      1. A late phone bill of $120.00.
      2. Supplies he bought at Office Max for $80.00.
      3. Some parts he bought for $25.00 at the hardware store to repair some light fixtures.
      4. And you paid him $5.00 mileage.
      5. Use QuickBooks to charge this check for $230.00 to the following accounts:
      • Telephone: 120.00
      • Supplies: 80.00
      • Maintenance & Repairs: 25.00
      • Car Expense: 5.00