Want to Revamp Your Chart of Accounts? Here’s How to Do It!
As your business grows and evolves, so should your Chart of Accounts (COA). Have you experienced any of these COA frustrations recently?
Finding no clear matches when categorizing activity from bank feeds.
Encountering multiple similar accounts that are difficult to tell apart.
Missing numbers on some or all accounts.
Feeling like too much activity is being grouped into the same account.
Regularly dropping uncategorized activity into the Ask My Accountant account.
Accountant asking several follow-up questions about what is in various accounts.
Wishing for more detail in the Balance Sheet or Profit & Loss statement.
If so, it might be time to revamp your COA.
Updating your COA might seem like a big task, but it doesn’t have to be stressful. In this post, we’ll explore three different approaches to revamping your COA, so you can choose the one that best suits your business needs and current capacity.
Approach 1: Add New Accounts as They Become Necessary
This is the most straightforward approach. Instead of making sweeping changes all at once, you simply add new accounts to your COA as the need arises.
Best for: Businesses that are gradually expanding and don’t want to disrupt their existing setup.
Steps:
Review current COA. In QuickBooks Online (QBO) the complete accounts list can be found under Transactions > Chart of Accounts. Evaluate the usefulness of the existing accounts and identify any gaps where new accounts should be added.
Add new accounts. From the Chart of Accounts screen, select “New.” Accounts can be added one-by-one and must include a Name, Account Type, and Detail Type. An Account Number is also highly recommended.
That’s it!
Benefits:
Minimal disruption to existing processes.
Only adding accounts when they’re needed simplifies your COA.
Drawbacks:
Requires regular review and account additions.
May be difficult to maintain consistency in numbering, account typing, and naming conventions.
Approach 2: Import a New Chart of Accounts and Reclassify Activity
If your business has evolved significantly, it might make sense to import a brand new chart of accounts, especially if your old one no longer aligns with your needs. This approach is more comprehensive and involves reclassifying past transactions into the new accounts.
Best for: Businesses with significant changes in their activity or product/services offerings.
Steps:
Map out new COA structure. Create a new COA that reflects your updated business activities. This could be written from scratch or based on an industry-specific template. The most useful formats for the new COA would be an Excel, CSV, or Google Sheets file with separate columns for Account Number, Account Name, Account Type, and Detail Type.
Import new COA. In QuickBooks Online, you can import the new COA by going to Transactions > Chart of Accounts, clicking the down arrow next to “New” and selecting “Import.”
Reclassify past transactions. Move any current year transactions into the new accounts by opening each transaction and changing the assigned accounts or by asking your bookkeeper to use their Accountant Tools to reclassify the transactions in bulk.
Inactivate old accounts. Once all activity has been moved out of the old accounts, they may be inactivated. Inactivating accounts before their balances are completely cleared could lead to unbalanced financial reports or unknown balances in the Opening Balance Equity and other QBO default accounts.
Benefits:
Clean slate - a new COA perfectly aligned with current business needs.
Eliminates any old accounts that were cluttered or confusing.
Drawbacks:
Year-over-year comparisons will be less useful in the year of change, since all prior year activity was categorized using old accounts.
Can be time-consuming if there is a significant amount of current year activity to be reclassified.
Approach 3: Hybrid Approach – Analyze Existing Accounts and Import New Ones as Needed
This approach offers a balance between the first two. Rather than completely overhauling your COA or adding accounts one-by-one, analyze existing accounts to determine which ones are already functioning well and which new accounts should be imported. This way, you’ll avoid excessive reclassification while still adapting to your business’ needs.
Best for: Businesses that did not set up a robust COA at the start.
Steps:
Plan your ideal COA. Outside of your accounting software, create an ideal future-state COA. This could be written from scratch or based on an industry-specific template.
Analyze existing accounts. Go through your current COA to identify accounts that are materially the same as accounts in your ideal COA. If desired, rename these accounts to match the ideal and assign numbers to all. This step prevents excessive reclass work for accounts that are already in good shape.
Import new accounts. For any future-state accounts that were not matched to existing ones, import the required information as in Approach 2. On the import screen, you can de-select any accounts that you do not need to import.
Reclassify past transactions. Most activity should already be in the correct accounts. But you may want to reclass some transactions out of specific accounts you would like to retire.
Inactivate old accounts. Inactivate any accounts from the old COA that were not matched to the new COA. Make sure that the balances are zero in any account before inactivation.
Benefits:
Useful if there is a significant amount of current year activity that you don’t want to reclass.
Year-over-year reporting is still effective, because most prior year accounts with activity are slightly renamed - not eliminated.
BONUS: This is a great excuse for you (or your bookkeeper) to analyze your books at a granular level and identify potential improvements.
Drawbacks:
Can be time-consuming to plan the new COA and analyze all current year accounts and their activity.
Requires additional attention to import only the accounts you need, instead of a whole template.
Key Steps for All Approaches
Run Reports. Before and after making any changes to your COA, always run key financial reports like the Balance Sheet and Profit & Loss statement. Double-check that, at the very least, total assets, liabilities, equity, and profit remain consistent. This step will provide high-level confirmation that the integrity of your financial information has remained intact throughout the process of updating the COA.
Check for Redundancies. After revamping your COA, carefully review it for any redundant or overlapping accounts whether lingering or newly added. In most cases, you will reclass all activity into one of the two accounts and inactive the duplicate.
Audit Log. If anything looks off after making changes, check the audit log in your accounting software. It can help you track what was changed, so you know which actions to undo, if necessary.
Should You Hire a Bookkeeper to Revamp Your COA?
While updating your COA is something you can tackle yourself, there are distinct advantages to hiring a bookkeeper. Here’s why you might want to consider bringing in a pro:
1. Access to Advanced QuickBooks Online Tools
Bookkeepers are familiar with the standard features of QuickBooks Online (QBO), and they also have access to additional tools and advanced functionalities. A bookkeeper can use the batch reclassification tool to efficiently move transactions into the appropriate accounts for the current year instead of manually reclassifying each transaction.
2. Expert Analysis of Existing Accounts
A bookkeeper has a trained eye for identifying when your current COA is outdated, redundant, or missing important categories. They can analyze your existing accounts and assess whether your business would benefit from changes, making sure your financials are comprehensive and useful.
3. Assignment of Meaningful Account Numbers
If you're not sure how to number your accounts or how to maintain a logical numbering system for future growth, check out this post or reach out to a bookkeeper. Properly numbered accounts ensure your financial records remain easy to navigate.
4. Ongoing Support
Revamping your COA might be a one-time project, but keeping it in great shape will require ongoing maintenance. A bookkeeper can ensure that your COA keeps up as your business grows and evolves.
If you’re ready to take the leap and revamp your COA, a bookkeeper could be the support you need to get the job done right.
Need a Chart of Accounts Template for Your Businesses?
If you’re ready to revamp your own COA, check out this live template I’ve put together for consulting and other service businesses - no email required! This template will help you structure your accounts in a way that’s logical, numbered, and easy to use.
Click here to view or import the Chart of Accounts template.
TL;DR
Revamping your Chart of Accounts doesn’t have to be overwhelming. By choosing the right approach—whether adding accounts as needed, importing a new structure, or taking a hybrid approach—you can reorganize your COA in a way that’s simple, effective, and tailored to your business’ needs.
Whatever method you choose, make sure to run financial reports before and after the changes, check for redundancies, and use the audit log to ensure everything is in order.
Ready to get organized? Grab your free Chart of Accounts template or reach out with any questions!