Why the Chart of Accounts is Important For Your Ad Agency Accounting

The Chart of Accounts is the backbone of your accounting system. It is the complete list of all the accounts you need to categorize your business activities. In this article, we’ll walk you through the definition of the Chart of Accounts, how to create one, and how you can keep your accounts organized with the 10 best practices for ad agencies.

What is a Chart of Accounts?

A Chart of Accounts (COAs) is a list of financial accounts in your agency’s general ledger, which records and centralizes all transactions within an accounting period. This comprehensive list categorizes your assets, liabilities, equity, revenue, and expenses, aligning them with your balance sheet and income statement. Each account is assigned a code for reporting and analysis to help you generate accurate financial reports to effectively run the agency. 

COAs consist of two main categories: balance sheet accounts and income statement accounts. Balance sheet accounts let you know the agency’s overall financial position, while income accounts inform the agency’s revenue and expenditure reporting.

Within balance sheet accounts, there are three subdivisions: asset accounts for owned resources, liability accounts for debts, and equity accounts representing your agency’s value after subtracting liabilities.

For income statement accounts, there are two subdivisions: revenue accounts for income sources, and expense accounts for expenditures.

Each account type is represented by a line in the COA, which provides a brief description and a unique code. These lines correspond to your agency’s general ledger, ensuring organized and accurate financial records.

Why Do You Need A Chart Of Accounts?

The chart of accounts enables you to effortlessly track and analyze your agency’s transactions by centralizing your financial data. You can leverage this information to refine your business processes and drive future growth.

Moreover, the chart of accounts forms the basis for creating essential accounting reports. It allows you to easily generate financial statements and file tax returns, whether you handle it internally or rely on a professional accountant.

With a robust chart of accounts, you can simplify your financial recordkeeping and gain insights into your agency’s financial health. It empowers you to make informed decisions and optimize your agency’s performance.

How to Create a Chart of Accounts

Determine What Types of Data to Track

Grab a pen and paper just to jot down how you want your company to make revenue and what expenses you think you will have while in business and then categorize them into small groups.

Different businesses have unique needs and may pick specific categories for detailed COAs. However, in a typical chart of accounts for ad agencies, there are eight primary account types:

  • Assets: Categorized into fixed or current assets, this information shows what your agency owns. Current assets can be quickly converted into cash, while fixed assets cannot easily be sold for cash, but act as long-term investments that generate revenue, such as real estate, equipment, patents, etc.
  • Liabilities: Liabilities represent your agency’s debts and loans to raise capital, such as from a bank or by issuing corporate bonds. They are recorded as sums of money owed, and divided into short-term and long-term debts.
  • Equity/Capital: Organize capital accounts based on your agency’s structure. Equity accounts can include common stock, treasury stock, retained earnings, general reserve, and owners’ equity.
  • Revenue: Track the income your agency receives from everyday business tasks. Revenue can come from all sources, including earned from sales, and unearned like investment gains.
  • Cost of Goods Sold: This account includes expenses related to producing your products and services. For agencies, this is mainly associated with labor costs for the employees working on your projects. 
  • Overhead Costs: These are ongoing expenses your agency incurs, irrespective of product sales. Examples include administrative payroll, rent, travel expenses, insurance, legal fees, and Internet expenses.
  • Other Income: Record any income your agency earns beyond regular operations, such as rent from owned buildings, interest income, or capital gains from selling fixed assets.
  • Other Expenses: Capture other non-cash expenditures like depreciation and amortization, capital losses from asset sales, interest paid, and taxes paid.

Decide on Your Account Ranges

Account ranges are used to differentiate your business into Profit and Loss. Those are broken down even further to:

  • 1000-1999 Asset
  • 2000-2999 Liability
  • 3000-3999 Equity
  • 4000-4999 Revenue
  • 5000-5999 Cost of Goods Sold
  • 6000-6999 Expenses
  • 7000-7999 Other Revenue
  • 8000-8999 Other Expenses

When using Function Point to export transactions into QuickBooks one key aspect to look at is to have numbering and naming of the accounts on your chart of accounts match the list you have in Function Point.

Picking the Number to Use for Sub-Accounts

For each type of account you will have sub accounts the best practice is to allow room for account growth. If you have an account 2000 Current Liabilties the next number to use would be 2010 Tax Payable, giving you enough room just in case you need to add accounts in between Current Liabilties and Tax Payable.

Gain Insights into Your Agency’s Financial Health

Key Tips on Identifying and filling gaps in the measurement of reporting metrics

Best Practices for Your Chart of Accounts 

  1. Structure the COAs to Support Management Decision-Making:

Organize your chart of accounts in a way that provides clear insights into your agency’s financial activities. Align it with budget categories to easily track performance against expectations. This approach facilitates categorization of financial data based on short- or long-term goals, thus streamlining account management and enabling informed decision-making.

  1. Utilize Structured Codes and Subheadings:

Implement a five-digit structured code system to allow for multiple levels in your chart of accounts. This provides granularity and flexibility for future additions or adjustments.

  1. Embrace Modern Accounting Software:

Utilize specialized accounting software to enhance transaction details and reduce the complexity of coding schemes. These platforms offer additional dimensions that can replace the need for intricate account structures. When you integrate with Function Point, it helps to break down where your creative agency is excelling in revenue and shows which services need more attention.

  1. Create Separate Accounts for Important Entries:

Separate important non-cash account entries within your numbered chart of accounts. This practice improves accuracy in financial reporting and aids in identifying relevant accounts at the reporting period’s end. 

  1. Be Cautious When Adding New Accounts:

Before adding new accounts, review your existing COAs to check if the transaction can be included in an existing asset, revenue, liability, or expense account. Avoid unnecessary account proliferation that can complicate your financial reporting.

  1. Space Out Account Numbers:

Leave room for growth by spacing out account numbers, like numbering accounts as 1001, 1010, and 1015. This makes it easier to add new accounts between existing ones while keeping a logical order. 

  1. Avoid Excessive Details:

Balance information and readability by keeping your chart of accounts to three levels. If you have more levels, use subledgers for detailed breakdowns to ensure clarity without overwhelming complexity.

  1. Make Changes at Period-Ends:

Minimize changes to your chart of accounts, particularly during accounting periods. Avoid removing lines or reorganizing accounts mid-period to maintain consistency and accuracy.

  1. Preserve Historical Data:

Do not delete old accounts from your chart of accounts, as it can distort historical reports. Instead, mark inactive accounts by appending the term “INACTIVE” to their names to prevent new transactions.

To Wrap Up

A well-organized chart of accounts reflects the structure of balance sheet and income statement, which makes it crucial for any agency to monitor its financial health. By implementing the above 9 tips, your ad agency can optimize its COAs, facilitating efficient financial management and reporting processes.

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