Although the topic itself might sound very naive to the core accounting folks but still there’s very little information available on the web when it comes to some of best practices for ERP implementation. I have been an ERP implementation specialist for the past 14 years of my career. I’ve decided to write a series of articles that will try to give very generic approach to this topic. There are no right or wrong ways and the below is an attempt to describe what’s best when it comes to configuring your books.
Designing a good Chart of Accounts is a work of art more than science. The tendency we often see is that users want to build more complexity into their Chart of Accounts than is needed. For the sake of simplicity, lets refer to Chart of Accounts as COA, henceforth in this article. As a good practice, always plan out your COA in excel, where you can always update, insert and move GL accounts while in the planning phase.
Ordering the GL Accounts
While there are no set rules, below is one of the best practices that I adopt while trying to order and name the GL accounts.
- Assign 1 series for Assets
- Assign 2 series for Liabilities
- Assign 3 series for Equity
- Assign 4 series for Revenue
- Assign 5 series for Cost of Goods Sold
- Assign 6,7,8 series Expenses
- Assign 9 series Other Incomes and Expenses
1— Assets will typically begin with “1” and are ordered by liquidity. The less liquid the asset the higher the GL account number. Below is a typical order of liquidity for assets with some example GL accounts:
- Cash (Example: 1010-Cash Savings Bank of America)
- Accounts Receivable (Example: 1200-Accounts Receivable)
- Prepayments (Example: 1400-Prepaid Expenses)
- Deposits (Example: 1450-Deposits)
- Inventory (Example: 1500-Inventory)
- Fixed Assets (Example: 1600-Fixed Assets)
- Intangible Assets (Example: 1800-Goodwill)
2— Liability accounts begin with “2” and are also ordered by liquidity. The less liquid the liability the higher the GL account number. Most implementers set up credit cards and lines of credit as “Bank” GL accounts.. Below is a typical order of liquidity for liabilities with some example GL accounts:
- Accounts Payable (Example: 2000-Accounts Payable)
- Credit Cards (Example: 2010-Chase Credit Card 9176)
- Lines of Credit (Example: 2020-BOA Line of Credit)
- Accrued Expenses (Example: 2100-Accrued Expenses)
- Notes Payable (Example: 2600-Bank Note Payable)
- Long Term Debt (Example: 2700-Long Term Debt)
3— Equity accounts typically begin with “3”. It is common to just have a few equity accounts as detailed below:
- Opening Balances (Example: 3000-Opening Balances) : Used for data migration
- Company Stock (Example: 3010-Issued Stock) : Typically not used for small businesses
- Contributed Capital (Example: 3020-Owners Contributions) : Owner contributions/distributions
- Current Year Earnings (Example: 3050-Current Year Earnings) : System account required
- Retained Earnings (Example: 3060-Retained Earnings) : System account required
4— Revenue accounts typically begin with “4”. (Example: 4000-Product Revenue)
5— Cost of Goods Sold typically begin with “5”. (Example: 5000-Direct Labor)
6, 7, 8— Labor, Sales, Facilities and Marketing often begin with these numbers. This does vary quite a bit by industry. It is best to group all of one category of accounts together. Examples:
- 6000-Staff Labor
- 7000-Office Rent
- 8000-Advertising
9— Other income and expense often begin with “9.”
- 9000-Realized Gain/Loss on Foreign Currency Exchange
- 9010-Unrealized Gain/Loss on Foreign Currency Exchange
- 9500-Interest Income
Example of Sample Balance Sheet
| GL Account Name | Type | Sub-Type 1 | Sub-Type 2 | Bank |
| 1000-Cash Bank of America Checking | Balance Sheet | Assets | Cash | TRUE |
| 1200-Accounts Receivable | Balance Sheet | Assets | Current Assets | |
| 1205-Unapplied AR Suspense | Balance Sheet | Assets | Current Assets | |
| 1210-Shareholder Receivables | Balance Sheet | Assets | Current Assets | |
| 1400-Prepaid Expenses | Balance Sheet | Assets | Current Assets | |
| 1450-Deposits | Balance Sheet | Assets | Current Assets | |
| 1500-Inventory | Balance Sheet | Assets | Current Assets | |
| 1600-Fixed Assets | Balance Sheet | Assets | Fixed Assets | |
| 1650-Accumulated Depreciation | Balance Sheet | Assets | Fixed Assets | |
| 2000-Accounts Payable | Balance Sheet | Liabilities | Current Liabilities | |
| 2010-Chase Credit Card (9176) | Balance Sheet | Liabilities | Current Liabilities | TRUE |
| 2011-BOA Amex (69184) | Balance Sheet | Liabilities | Current Liabilities | TRUE |
| 2012-Capital One Bill (8165) | Balance Sheet | Liabilities | Current Liabilities | TRUE |
| 2013-Capital One Susan (0821) | Balance Sheet | Liabilities | Current Liabilities | TRUE |
| 2014-Chase SouthWest Card (8793) | Balance Sheet | Liabilities | Current Liabilities | TRUE |
| 2015-Capital One George (9328) | Balance Sheet | Liabilities | Current Liabilities | TRUE |
| 2020-BOA Line of Credit | Balance Sheet | Liabilities | Current Liabilities | TRUE |
| 2050-Retirement Payable | Balance Sheet | Liabilities | Current Liabilities | |
| 2100-Accrued Expenses | Balance Sheet | Liabilities | Current Liabilities | |
| 2120-Benefit Liabilities | Balance Sheet | Liabilities | Current Liabilities | |
| 2500-Deferred Product Revenue | Balance Sheet | Liabilities | Current Liabilities | |
| 3000-Contributed Equity | Balance Sheet | Owners Equity | Equity | |
| 3050-Retained Earnings | Balance Sheet | Owners Equity | Equity | |
| 3060-Current Year Income | Balance Sheet | Owners Equity | Equity |
Example of Sample Revenue
| GL Account Name | Type | Sub Type 1 |
| 4000-Product Revenue | Revenue | Product Revenue |
| 4005-Partner Product Revenue | Revenue | Product Revenue |
| 4010-Service Revenue | Revenue | Service Revenue |
| 4200-Reimbursed Travel | Revenue | Service Revenue |
Example of Sample Expense
| GL Account Name | Type | Sub Type 1 |
| 4900-Partner Sales Commission | Expense | Cost of Goods Sold |
| 4910-Merchant Bank Fees | Expense | Cost of Goods Sold |
| 5000-Staff Salary | Expense | Labor |
| 5050-Staff Benefits & Taxes | Expense | Labor |
| 5075-Staff Variable Pay | Expense | Labor |
| 5100-Contract Labor | Expense | Labor |
| 5300-Training & Education | Expense | Labor |
| 5800-Travel Expenses | Expense | Travel |
| 5810-Staff Meals and Events | Expense | Travel |
| 5820-Non-Staff Meals & Ent | Expense | Travel |
| 5822-Travel Meals | Expense | Travel |
| 5825-Mileage | Expense | Travel |
| 5830-Vehicle Expense | Expense | Travel |
| 5840-Depreciation Expense | Expense | Facilities |
| 6000-Office Rent and Utilities | Expense | Facilities |
| 6005-Office Supplies | Expense | Facilities |
| 6100-Office Equipment | Expense | Facilities |
| 6150-Office Furniture | Expense | Facilities |
| 6200-Telecomunications | Expense | Facilities |
| 6500-Software Licenses | Expense | Facilities |
| 6700-Office Repairs & Maint | Expense | Facilities |
| 6800-Leasehold Improvements | Expense | Facilities |
| 8000-Events and Tradeshows | Expense | Sales & Marketing |
| 8050-Graphics Production | Expense | Sales & Marketing |
| 8075-Marketing Gifts | Expense | Sales & Marketing |
| 8200-Public Relations & Promotion | Expense | Sales & Marketing |
| 8300-Advertising | Expense | Sales & Marketing |
| 8400-Partner Referral Fees | Expense | Sales & Marketing |
| 9200-Legal & Professional | Expense | General & Administrative |
| 9210-Workers Compensation Ins | Expense | General & Administrative |
| 9300-Commercial Bank Fees | Expense | General & Administrative |
| 9320-Interest Expense | Expense | General & Administrative |
| 9400-Recruiting | Expense | Labor |
| 9500-Charitable Contributions | Expense | General & Administrative |
| 9600-Corporate Taxes | Expense | General & Administrative |
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