One invoice traced through a broken chart of accounts, then a repaired one

The most useful thing to learn from someone else's account list is how to read one. Charts are private, and studying a named business would tell you about that business, not the method.

What transfers is the reading order: what to look at first, what each defect looks like from the outside, and what it costs in the reports.

So this is a reading method, applied to a specimen that is entirely invented, followed by one ordinary transaction traced through the broken version and the repaired one. Every account name and every figure below is made up to show the mechanism.

What to take away

Six passes, in this order

The specimen

Here is an invented extract from the cost section of a chart, of the kind that grows when accounts are added one improvisation at a time.

6100  Wages
6110  Wages - North workshop
6200  Rent
6210  Rent - North workshop
6300  Materials
6310  Materials (new)
6320  Consumables
6400  Ace Supplies
6500  Delivery
6510  Postage
6600  General expenses
6650  Sundries
6700  Ask my accountant

Reading it

Shape and spine. Everything sits in one block. Materials and wages are beside rent and postage, so no report built from this list can produce a cost of delivering the work, and therefore none can produce a gross margin. That is the finding that matters most, and it takes ten seconds.

Containers. Three of them, which is one more than most businesses manage. General expenses and sundries do the same job and nobody can say which wins, so the split between them records who did the coding. The third is a holding account that has been renamed rather than emptied.

Encoded names. Two accounts carry a site. The damage is not that the site is encoded; it is that it is encoded on two costs out of twelve. A report of what the North workshop costs will show wages and rent and nothing else, and it will look complete. A partial dimension is worse than no dimension, because it produces a number that invites a conclusion.

Duplication. Materials and Materials (new) is a definition problem that somebody solved by making a second account. Nothing about the name tells the next person which to use, so from that day the split has been arbitrary. Delivery and Postage are the same failure in a subtler form: one of them almost certainly holds both freight in on stock and freight out to customers, which are costs of two different things.

A supplier as an account. Ace Supplies tells you what you bought only for as long as that supplier sells one thing, and it stops meaning anything the moment you change supplier.

Numbering. The blocks leave no room. Consumables at 6320 sits under a materials heading it does not belong to, and there is nowhere to insert a direct cost without breaking the sort.

What the repair looks like

5000-5999  Direct costs
  5000   Materials consumed on jobs
  5100   Workshop consumables
  5200   Subcontracted work (see below on who counts as a subcontractor)
  5300   Outbound delivery to customers
  5400   Field labor booked to jobs
6000-7999  Operating costs
  6000   Wages not booked to jobs
  6500   Premises
  7000   Postage and stationery
  7500   Administration
9999   Holding: cleared monthly

One account there carries a question the chart cannot settle: whether a person paid for work is a subcontractor at all is decided by the federal test for independent contractor or employee, not by which account the invoice lands in.

Site becomes a dimension recorded on every transaction rather than on two accounts. Ace Supplies is retired, not deleted, and its history stays readable. Materials (new) is merged into materials with a definition sentence written down: material bought for a specific job is direct, material bought for the workshop shelf is consumables.

The derivation behind that structure, working backwards from the reports the business actually reads, is set out in the framework for building a chart from its outputs.

One invoice, both charts

Now take an ordinary transaction. A general merchant sends an invoice totaling 1,000 for goods supplied on 14 March, payable in 45 days.

Under the old chart there is one plausible destination, because the account is named after the supplier.

The entries under the repaired chart, dated 14 March because that is when the goods were supplied and not when the payment leaves:

When the invoice is paid at the end of April, the payable of 1,000 is cleared and the bank falls by 1,000. Nothing touches the profit and loss statement, because the cost was already recorded in March. That timing discipline is the subject of the expense recording guide.

What the reports say

Suppose the month's revenue is 12,000 and the transaction above is representative of how costs arrive.

The old chart can produce a total for costs and a profit figure. What it cannot produce is a cost of delivering the work, because materials, delivery, field labor and stationery are all in the same undifferentiated block. Every question about whether the work is priced correctly is unanswerable, and the only visible number is the one at the bottom.

The repaired chart, on the same transactions, separates 950 of the 1,000 as a cost of delivery and 50 as a cost of existing. Run across the month, say direct costs come to 6,800.

Gross profit is then 5,200, and the margin is roughly 43%. Next month, compare that figure with this one, and a job consuming more material shows up while there is still time to reprice it.

The profit at the bottom is identical under both charts. Everything else about what you can see is different. That is the whole case for the exercise, and it is also why the readings in the measurements that show a chart is drifting are worth taking before the drift becomes a rebuild.

Doing it without breaking the past

Change at a period boundary, write the mapping from every old account to its new home before touching anything, and decide explicitly whether prior periods will be restated using that mapping. If they will not be, write the discontinuity down where the next person will find it.

Retire accounts rather than deleting them, and check the standing coding rules the week after, because a rule pointing at a merged account keeps posting somewhere. The type rules and numbering conventions underneath all of this are in the chart of accounts overview.

Common questions