A chart of accounts lists all of the accounts that a company has in its general ledger. It is a tool used to categorize all financial transactions made by a business during a specified accounting period. The chart of accounts displays the account number, account name, account type, description, and balance for each account. A well-organized chart of accounts aids in providing a clearer picture of the financial health of the company, which may be used to attract investors and shareholders. In contrast, a poorly structured chart of accounts can cause major financial management problems, operational inefficiencies, and long-term business failure.
Businesses use accounting software such as NetSuite to automate and streamline their accounting processes. NetSuite OneWorld streamlines multi-subsidiary operations and delivers real-time visibility at the local, regional, and corporate levels for international corporations. It allows users to establish a Full Multi-Book Accounting system, which enables the concurrent maintenance of numerous sets of financial records to support multiple accounting and reporting standards. NetSuite also features a multiple language capability that allows users to select from various system-supported languages.
This article uses NetSuite version 2021.2.
Summary of key concepts
Setting up a chart of accounts in NetSuite is one of the first stages of managing financial transactions. It is required for both posting and non-posting transactions and aids in the organization and generation of financial reports such as the Balance Sheet, Profit and Loss statements, General Ledger, Trial Balance, Cash Flow Statements, and Statements of Owner's Equity.
The table below outlines the factors that a company should consider when creating and updating a chart of accounts.
Best Practices for NetSuite Charts of Accounts
To view the chart of accounts in NetSuite, go to Setup > Accounting > Manage G/L > Chart of Accounts.
Plan and Test the Chart of Accounts Before Implementation
NetSuite offers a test environment called the Sandbox, where users can plan, test, and observe each activity at every stage of implementation. Using the test environment can help validate data and detect errors or complications that may arise during and after implementation.
Categorize the Account List Properly
One of the keys to having a well-organized chart of accounts is to categorize correctly to get accurate reports and insights about the business's performance. The chart of accounts in NetSuite provides a set of destinations for the posted transactions and categorizes them into Assets, Expenses, Income, Liabilities, and Equity. These categories are used to track and report monetary data. In the advanced financial module, NetSuite has another category called Statistical Account that is used to track non-monetary data.
Make Use of NetSuite Classification
NetSuite classifications, such as Department, Classes, and Location, help users better organize their accounts and preserve accuracy. This feature helps minimize the creation of too many accounts. For example, instead of creating a separate salary expense for Marketing, Finance, Sales, and other departments, users can simply create one account and tag the specific department.
Departments are useful when designating a transaction to an employee who is a member of a specific internal team; this can help track the income and expenses of each department over any period of time in the reports. Classes, on the other hand, are useful for wider segments to track where income and expenses are generated. For example, users can create Classes to track where the Finance department sources its office expenses. Through Classes, users can determine if Finance sources from new suppliers or repeat suppliers. Purchase orders would then indicate whether the transaction was created for new or repeat suppliers. Users with the Administrator role can use the Locations feature to keep track of employees and transactions across multiple offices or warehouses.
Align the List Based on the Company's Needs
There isn't a standard chart of accounts for every business. The accounts that are included in a company's financial statements are determined by the nature of its operations.
For example, a liability account should not be used by a company that uses cash-basis accounting. Similarly, if the company is a service, an inventory account is not required.
Use a Short but Clear Account Description
Take advantage of the account description field in the chart of accounts of NetSuite, which is the most straightforward method of describing how to use the accounts. It should specify when and for what types of transactions the account should be used. A clear description helps avoid confusion.
Use Account Numbers
NetSuite users have the option to use the standard account numbering set by the system or to create their own. Accounts numbers are another way to classify transactions, helping group accounts that are similar in nature. For example, in the standard numbering set by NetSuite, all accounts that start with the number 1 should be considered asset accounts, all accounts that start with number 2 will be considered liability accounts, and so on. To enable the use of account numbers, go to Setup > Accounting > Preferences > Accounting Preferences (Administrator access only). Click the General subtab and mark the box beside Use Account Numbers. Click Save.
When users enable the Use Account Numbers preference, four-digit account numbers are automatically paired with existing accounts, such as the following:
Account numbers can be alphanumeric, with a maximum of 60 characters.
Do Not Create Too Many Accounts
Creating too many accounts may lead to confusion: It can make it difficult to categorize transactions, which may also lead to charging erroneous accounts. For example, users may find it perplexing as to which account they should use if both Utilities and Telephone accounts exist.
Another concern that could develop from having too many accounts is an increase in the cost of an audit. An external auditor could take longer than normal to audit an extensive chart of accounts.
Be Consistent with the Chart of Accounts
Consider the future when establishing the chart of accounts. Businesses frequently make comparisons between their past and present performance. Changing the chart of accounts regularly will have an effect on the financial report's historical data.
Consolidate and Simplify Accounts
NetSuite users also have the ability to customize accounts: They can add, edit, merge, or delete accounts as needed. Accounts that are redundant, unhelpful and out of date should be deleted, while those of the same type can be edited or merged. Users can amend accounts at any point during the year as long as the appropriate changes to the related entries have been made.
When it comes to deleting an account, though, users should wait until the end of the year. The activity in an account prior to its deletion will not be reflected if it is deleted in the middle of the year. This has an impact on the accuracy of the financial record; thus, if a user decides not to use a specific account, they should wait until the end of the year to remove it.
Be Aware of NetSuite Limitations
- Users cannot change the account type for an account that has associated posting and non-posting transactions, such as sales orders and revenue commits.
- Users cannot create a new account or update an existing account with an account number that already exists. Attempting to do so will prompt an error showing that the account number is already used.
A chart of accounts is a list of all the accounts in the company. It is the first item users must configure to begin processing financial data in NetSuite. Businesses should adhere to best practices to keep their chart of accounts properly structured. A well-organized chart of accounts decreases the possibility of errors in financial reporting, which is critical when making financial decisions.