I was recently working on a clients books and noticed that they didn’t use account numbers. And I asked them why, they didn’t have any reason. They simply replied “Why do I need them?”
The Chart of Accounts is the framework to your reporting system in your business. This framework is a complete list of how each and every transaction recorded will be accounted for. Think of it as a part of the legend for the filing system by which you will record your revenues and expenses.
The use of account numbers creates structure and allows you to group your transaction based on the five main categories of accounting.
- Assets
- Liabilities
- Equity
- Income
- Expense
Each category consists of transactions that solely meet the criteria of that category. (See next week’s blog for the criteria of each category). This criteria allows you to group expenses and revenues in such a way that you can perform an analysis of the transactions for certain points in time. Because your transactions will be group in a systematic way, you will be able to pull the data together more easily.
While you may think that alphabetical order is the best systematic way to go, it actually is not. Alphabetical order creates more confusion and allows for more user errors. If you misspell a word or place too many spaces, you end up with multiple accounts serving the same purpose. Naming convention errors and account hierarchy using alphabetical order can also cause your reports to look confusing and overwhelming. Numerical order creates a seamless flow in your reports and allows them to be more presentable and provide ease of readability.
Remember using account numbers is just another organization tool that you can use in your business to allow your business to run more efficiently.
Do you use account numbers in your accounting package? Why or why not?
All rights reserved. © 2013
