A clean account structure to build reporting on

Design it around the reports you want

A chart of accounts is not a filing cabinet, it is the structure your reports are generated from. If you want to see margin by product line, the accounts have to separate the costs that move with each line. If you never look at a breakdown, the accounts that produce it are cost without benefit.

The commonest mistake is the opposite of what people expect. It is not too few accounts, it is too many: a chart that gains a category every time somebody is unsure where to post something, until year-on-year comparison is impossible because the categories keep moving.

The standard grouping

Rules worth setting once

• One account per decision. If knowing the split would not change what you do, the split does not need an account
• Keep cost of sales strictly for costs that move with sales, or the gross margin stops meaning anything
• Never post to a parent account that has children, since the report will not add up the way anybody expects
• Use a suspense account deliberately and empty it every month, rather than letting unknowns spread across real accounts
• Write down what goes where, in one page, and keep it with the books
• Change the structure at a year end, not mid-year, so comparatives survive

What changes by entity type

• Sole proprietor Equity is simple and owner drawings need their own account, kept strictly apart from business expenses.
• Partnership or multi-member LLC Each owner needs their own capital and drawings accounts, because the allocation between them has to be supportable.
• Corporation Share capital, additional paid-in capital and retained earnings are separate, and owner compensation runs through payroll rather than drawings.