Extending Your Financial Outline? Monthly Metric Assessment: Length of Account Chart
The Chart of Accounts (COA), a comprehensive listing of general ledger account names and identification numbers, is a vital accounting tool used for transaction processing, accounting activities, reconciliations, and financial reporting. The overabundance of accounts in a COA, however, can create challenges for finance teams.
Excessive COAs lead to increased review time, more reconciliations, additional system maintenance, and a higher likelihood of coding errors. According to industry data, organizations at the 25th percentile have 180 or fewer accounts in their COA, whereas those at the 75th percentile have over triple the number, with 680 or more accounts.
One example of a runaway COA growth is APQC, which had more than 5,000 accounts when they transitioned to a new ERP system. This excessive number made the cleanup process the most challenging part of the project. The bloated COA was often the result of adding more accounts, subaccounts, and project numbers without thinking through the consequences, as well as the tendency to compare numbers with the prior period without eliminating any accounts.
An oversized COA can also prolong monthly and year-end close cycle times due to the time-consuming and tedious reconciliation and investigation of the numerous account variances from the mushrooming COA.
To prevent unnecessary COA growth, organizations should maintain regular maintenance and perform periodic (at least annual) reviews of the COA to eliminate inactive accounts as needed. Accounts with little or no balance can be a sign that streamlining and reduction are required.
Moreover, it is essential to establish governance mechanisms for categorizing and reporting transactions to internal and external stakeholders. Any changes made to the COA should be the outcome of a disciplined process with oversight from a process owner. The reporting needs of these stakeholders should drive the changes made to the COA.
In conclusion, reducing an oversized COA and preventing further unnecessary growth requires simplifying and consolidating accounts, implementing logical organization, maintaining flexibility and scalability, utilizing technology and automation, educating and training staff, and conducting regular audits and establishing an approval process for new accounts. By adhering to these strategies, organizations can optimize their COA efficiently and align it with their financial reporting needs.
- To ensure efficient transaction processing and financial reporting, organizations should maintain regular maintenance and perform periodic reviews of their Chart of Accounts (COA), eliminating inactive accounts and streamlining the structure.
- Excessive COAs can prolong monthly and year-end close cycle times due to the time-consuming and tedious reconciliation and investigation of numerous account variances, thus hindering financial growth.
- Preventing unnecessary COA growth requires a disciplined process with oversight from a process owner, establishing governance mechanisms for categorizing and reporting transactions, and utilizing technology and automation to optimize the COA and align it with the organization's financial reporting needs.
