At Stride, we have a process and a mindset called “Stride Clean”. It is the process of setup and review to ensure your books and workflow are clean and consistent. Stride Clean is a state of being optimized for accuracy and efficiency and greatly reduces stress. Stride Clean also keeps us grounded in our commitment and principle of ensuring that business owners with a thirst for continuous improvement achieve their highest and best use.
Part of our Stride Clean process is a clean and orderly workflow so we can deliver clean and accurate financials. One component of this is a proper setup for your chart of accounts, or COA. A chart of accounts is an index of every financial account in your general ledger. It allows you to sort all transactions incurred into subcategories. The separation of revenue, liabilities, assets, and expenses provides insight into the various parts of your business and performance.
Most chart of accounts start off organically – you follow the QuickBooks set up recommendations for your type of business, but then realize you need to add an account to track a specific item, and another to maybe keep track of a certain vendor. After some time, you can understand your account structure, but can your accountant? Your COA may also be set up as account names only. Having account numbers (or GL / general ledger account numbers) ensures your COA is in the proper format and allows for consistency.
For any chart of accounts, there are five sections:
When set up properly, they are shown in the order that appear in your financial statements. Assets, liabilities, and equity make up the balance sheet and are shown first. Revenue and expenses are from your income statement, or P&L. For each of the five major sections, there are sub-categories. Revenue, for example, could include these subcategories:
o Core Consulting
o Non-Profit Consulting
o Speaking Engagements
o Book Sales
The sum of these sub-accounts would equal total revenue.
A COA can become very complex, especially for companies with many different service lines. But if you understand the general setup, you will have a strong basis for financial analysis. Consistency is key. Using a category and sub-category structure brings organization. Adding account numbers brings logic and organization. Some companies use a four-digit number, and some five or more. As your company grows, so will your COA. Plan accordingly so that you have room to slot in new sub-categories. A typical setup of account numbers by category looks like this:
- 10000’s – Assets
- 20000’s – Liabilities
- 30000’s – Equity
- 40000’s – Expenses
- 50000’s – Revenue
Additionally, there are three additional main groups:
6000’s – Operating Expense accounts such as salaries, rent, etc.
7000’s – Other Income accounts such as interest, depreciation, PPP loan forgiveness, etc.
8000’s – Other Expenses like taxes, interest paid, and penalties.
For each main category, the subcategory would be numbered to fit within the same block of assigned numbers. If we categorize our revenue example from above, it looks like this:
o 51000 – Core Consulting
o 52000 – Non-Profit Consulting
o 53000 – Speaking Engagements
o 54000 – Book Sales
The sum of these sub-accounts = 50000 – Revenue
There is a fine line between granular and too high level. Keep it simple so that you can get actionable insights about your business performance. Consider reviewing your GL detail report (all of the transactions that are booked to a GL account number) instead to look at specific information by vendor, project, etc. Map your Sales and Marketing subcategory down to broad things like advertising, promotional items, and conferences. Don’t create separate GL accounts for every conference your team attends. Instead, leverage project codes, or other fields within the GL string like the class field to tag expenses to more granular business units.
The key is to think about how you want to view your business performance. Being consistent about how you book things to answer that question, you’ll be able to maintain a “Stride Clean” general ledger. (And, your accountant will thank you for that!)
If you would like to learn more about how we make Stride Clean work for you, feel free to ask your Client Success Manager or reach out to us.