CHAPTER 13
Limit the P&L to 50 Account Codes
Show me a company with fewer than 100 account codes for its profit and loss statement (P&L) and I will show you a management accountant who has seen the light. However, I have seen many charts of accounts with more than 300 expense account codes in the general ledger (G/L), with up to 30 accounts for repairs and maintenance.
A poorly constructed chart of accounts leads to many problems:
- It encourages detailed reporting, with budget holders getting a 60- to 70-line P&L
- Budgeting at account code level instead of at category level
- Excessive codes, which increase the number of coding errors and time wasted
- A finance team wedded to detail
- A project accounting nightmare
- Subsidiaries slowly suffocating under the weight of their holding company’s process and procedures
Far too often the job of setting up the chart of accounts is given to management accountants who look skyward like a child yearning to become a rocket scientist. They live out this dream when they have an Excel spreadsheet or the chart of accounts in their hands. Common sense goes out the window, the CFO’s eyes glaze over at the chart of accounts progress meetings, the objective to reduce the account codes by over 40 percent gets lost, and, slowly but surely, just like the budget instructions, the chart of accounts takes on a life of its own.
Some rules to stop this from happening are:
- Allocate an account code when the relevant annual expenditure represents represent 1 percent or more ...
