Whilst none of us is ready to admit it, yet in a very well-hidden area of our mind, we are the first to declare that our Chart of Accounts is in dire need of a good clean-up. It may not be that bad but in any case there are very few of us who do not wish that their Chart of Accounts looks very different to the one that they have. But where to start from? It’s easy to realise that our Chart of Accounts is a tad too complex, but defining the nominal accounts that have to go away is a different story
1. Define All Nominal Accounts
When researching this topic we came across a vey interesting article from David Parmenter Create a lean machine | ACCA Global which defines two key rules to bear in mind when assessing the usefulness of a nominal account.
An expense account has to contribute at least 1% of the total cost
A revenue account has to contribute at least to 5% of our revenue
Two simple rules which may raise some serious disdain. However when analysing the two figures it would be immediately evident that the parallelism of the figures to the materiality levels benchmark as provide by ISA 320.9
5% of profit before tax from continuing operations
1% of total income or expenses
One major stumbling block, would still remain, and that would be the presentation of the management accounts. The theory is, at times, detached from the daily needs of the management. However, we need to keep in mind that the nominal account in itself can act as a bucket for many expenses which in turn may be further labelled in one way or another to create further breakdown of the total figure.
One very clear example is the use of departments, which would allocate partial sum of the expense to one specific department, without necessitating more nominal accounts. However the concept of departments may not be applicable to a company, especially if it is leaner and less structured. Yet, the same line of thought may be applied to a myriad of areas such as product-lines, customer-types, projects and any other criteria which necessitates specific analysis, both within the company but also as a separate section.
In light of all of the above, we do not intend to over-simplify the clean-up process. It may be a hard task and at times leading to weeks of internal warfare, but yet it’s an exercise which yields very positive effects, even to those who are not that keen towards a change.