Many organizations are burdened with an immense chart of accounts. Instead of having a short list of accounts in which to store information – such as one or two hundred accounts – they have a convoluted and lengthy chart of accounts that covers many pages. The sheer length of such a list introduces a number of problems into the general ledger function. For example, it is difficult to put numbers into the same accounts consistently on a recurring basis. Instead, they are recorded in different accounts, resulting in very poor comparability of information over time. Also, it can be very difficult to train a new general ledger accountant in the use of a very complicated chart of accounts; during the training period, it is likely that the accountant will make mistakes in recording financial information into the correct accounts, resulting in inaccurate financial statements. It is also more expensive to audit a long chart of accounts, since the outside auditors must spend more time reviewing more accounts. Furthermore, writing a new report with general ledger information is quite difficult if the information is being drawn from a veritable maze of accounts. In short, a plague of problems accompanies an excessively long chart of accounts.
The solution is to reduce the number of active accounts in the chart of accounts. This can take several forms, such as reducing the number of departments for which accounting information is stored, simply eliminating the overall number of active accounts, or reducing the number of statistical accounts that are used to contain non-accounting information. It is also possible to restructure the chart of accounts numbering system in order to give it a more orderly and comprehensible flow.
One problem is that users may still continue to code expenses to the old accounts, if only out of habit. To stop this from happening, the old accounts that are being retired must be blocked from further use in the system. Another issue is that when the chart is reduced, it is much more difficult to create historical reports to compare account balances to those of previous periods. For example, if five accounts are merged into one consolidated account, it becomes impossible to show how the balance in the new account compares to the old balances in the five accounts, unless the general ledger accountant copies all the information to an electronic spreadsheet and manually re-groups the information, a time-consuming task. There is no good way around this problem, unless the existing accounting software has a reporting feature that allows old accounts to be grouped for comparison purposes. This is a particular problem if the accounts are merged in the middle of a company’s reporting year so that it is not even possible to compare financial results from month to month. The best solution is to undertake major chart of accounts conversions only at the beginning of a reporting year, thereby avoiding any intra-year reporting problems. Any possible resolution is to fix the chart of accounts over a number of years by eliminating only a small number of accounts each year, which does not impact the inter-year comparability of accounts to any significant degree. A final issue with reducing the chart of accounts is that information may be stored in an account strictly for inclusion in a report that has some special purpose. If the account is discontinued, the report can no longer be completed, which may be an irritant to the former report recipient. To avoid this issue, review all reports generated from the general ledger and determine which accounts are used to create them. If the information in these special accounts is truly indispensable, then leave them alone.
A key step in implementing a reduction in the chart of accounts is to determine the threshold activity or dollar level below which there is no need to store information in a separate account. Then examine who is originating the transactions flowing through those accounts, and discuss the account reduction with them, to ensure that the proposed action will not affect them. Then determine which reports include the accounts that are targeted for elimination, and verify that they can be altered to accommodate the prospective change. Then put out a general notification about the change to ensure that all possible comments are received prior to the elimination, and then proceed with the account reduction.