Chart of Accounts Best Practices: 4 Ways to Get More Insight From Your P&L

You pay a bookkeeper or in-house accountant to prepare your financial statements. Then you open your Profit and Loss Statement (P&L) and realize it doesn’t help you much. When that happens, the problem may not be the numbers themselves. It may be how your chart of accounts is organized. A few best practices for your chart of accounts can turn the same data into reporting you can actually use.

The P&L and balance sheet are some of the first things we review when a new client comes to us, because they show how the company tracks its data. We notice the same reporting issues in businesses that make $100,000 a year and those that make $10 million.

The best way to make your P&L more useful is to organize your chart of accounts so the important numbers are visible at a glance. Break revenue into logical service lines, identify your cost of goods sold, group operating expenses into categories with subtotals, and avoid getting so detailed that the report becomes hard to read.

How Your Chart of Accounts Affects Financial Reporting

Your chart of accounts is the list of accounts your bookkeeper uses to code the transactions coming in from your bank accounts and credit cards. Those accounts become the lines on your financial statements, and as the owner, you have a lot of control over them.

If you’d like a refresher on how a P&L fits together, start with our guide to understanding your profit and loss statement.

Your P&L and balance sheet should give you insight at a glance. You’ll still need deeper analysis sometimes, but if you can’t learn much just by reading them, your chart of accounts probably needs attention. The goal isn’t more detail or less detail. It’s the right level of detail in the right places.

1. Break Revenue Into Logical Service Lines

Revenue lumped into a single line is one of the most common issues we see.

One business with $8 million in annual revenue had 99.999% of it coded to one account called contract revenue. That was technically accurate, since all of its work was contracted. But when we talked with the owner, they confirmed they offer several different types of services under those contracts. Breaking revenue out by service would show far more than one large number.

A marketing company we worked with had the same problem. All of its revenue sat in one service account, even though its services included community outreach, graphic design, and public communications. With those split out, the owner can compare each line’s revenue with the prior year’s. If community outreach tripled, they can ask what drove it and whether to keep growing it.

We do this at Clara CFO Group, too. Our P&L separates monthly retainer revenue from one-time projects and financial health assessments. That helps us budget and explains why a month was strong or weak. Two projects landing in the same month makes a noticeable difference to the bottom line.

A bookkeeper who knows QuickBooks Online or your accounting platform well can usually handle the mechanics, like coding each invoice to the right revenue account. Deciding which categories you actually need is the more strategic part.

2. Identify Your Cost of Goods Sold

Cost of goods sold, also called cost of sales, includes the direct costs of selling your goods or delivering your services.

One P&L we reviewed did this well, with direct labor, subcontractors, direct travel, travel meals, and other direct costs broken out. Another went straight from income to operating expenses with no cost of goods sold at all. When we talked it through with the owner, we found several items already on the P&L that belonged in cost of goods sold.

Gross profit = Revenue – Cost of Goods Sold.

This number shows if there’s enough left after direct costs to cover other business expenses. If the gap is too small, you can keep growing revenue, work diligently, and still never get ahead.

We also include the gross profit margin (the percentage) in each client report. This helps us see if direct costs are rising. If a client’s target gross profit margin is 50%, for example, we watch whether it stays on track and dig in when direct costs start pulling it down.

Do you want someone to take a second look at how you structured your P&L? Schedule a Discovery Call.

3. Group Operating Expenses Into Logical Categories

Beyond cost of goods sold, many P&Ls turn into one long list. One we reviewed had about $3 million in expenses under a single total, with nothing grouped. A report like that makes it tough to see your people’s costs, facility expenses, and spending on office supplies and software.

Putting related accounts next to each other isn’t enough. Roll them up into a subtotal. One P&L we reviewed combined gas, vehicle lease, and other auto costs into one total. This way, the owner could see the true yearly cost of the business vehicle.

Bring All Your People Costs Together

People costs are a good example of accounts that drift apart.

On one P&L, the expense section included:

• Paid time off
• Holiday pay
• Payroll taxes
• Medical benefits
• 401(k)
• Workers comp
• G&A labor
• Bonuses
• Overtime premium

If you run an $8 million agency, you should be able to see what your people cost in a year without adding it up yourself.

Grouping these costs also makes Labor Efficiency Ratio (LER) easier to calculate. We use LER, which compares gross profit to the total cost of your people, and we want to be able to pull it from the face of the P&L. You’ll still need to decide which labor costs to include, and our free Labor Efficiency Ratio Calculator can help.

Other Groupings Worth Considering

A few other groupings to consider:

• Office and facilities: janitorial services, office expenses, telephone and communications, rent, and possibly postage and delivery
• Computer and internet expenses
• Insurance
• Legal and professional fees: your accountant, attorney, and outsourced help such as an HR provider

Seeing professional fees in total shows what you’re spending on outside support. That makes it easier to spot costs worth a closer look, or to ask whether bringing someone in-house would make more sense.

4. Avoid Getting Too Granular

The fourth issue runs the other way. Some owners add an account for everything, and before long the P&L has 1000+ line items. Instead of gaining insight, you get buried in information.

Knowing how detailed to get is one of the most common balancing acts we work through as CFOs. A few rules of thumb help:

• If you have to scroll several times to reach the bottom, that may be a red flag.
• If it runs more than two or three printed pages, depending on font size, it’s probably too long.
• If an account holds a tiny amount relative to the size of the business, like $100 on a $10 million P&L with one transaction all year, think about materiality. It probably doesn’t need its own line.

Let Reports Handle the Detail

Your P&L doesn’t need to hold every level of detail you’ll ever want. In a modern accounting system, you can click into any account to see what’s underneath.

So skip vendor names in your chart of accounts. Instead of separate accounts for supplies from ABC Company and supplies from XYZ Company, use one supplies account and run a vendor report when you need the breakdown. The same goes for software. Listing Adobe, Slack, and every other subscription on the face of the P&L is far more detail than it needs to be.

Use Class or Department Tracking Instead of Extra Accounts

As their companies grow, some owners build departments right into the chart of accounts: sales payroll, sales software, operations payroll, operations software, and so on. The P&L gets very long, very quickly.

A better option is usually one payroll account, with the data sliced by department. On the QuickBooks Online plans that include it, class tracking lets you assign transactions to departments without creating extra accounts for each one. That way, you can keep your P&L summarized while still reviewing sales, operations, and accounting separately when you need more detail. It’s a big change to make, but it can make your P&L far more useful.

Signs Your P&L Needs a Cleanup

Not sure where your own reporting stands? Start with these questions:

• Does most of your revenue land in one account, even though you offer several services?
• Is it hard to tell what it actually costs to deliver those services?
• Can you see your total people costs without adding several accounts together?
• Does your P&L take several pages to review?
• Do you have accounts with so little in them that they add clutter?

If one or two of these sound familiar, those are good places to start reviewing your chart of accounts. If most do, it’s likely time for a wider cleanup. This raises bigger questions about what your leadership team needs to see.

A capable bookkeeper can help make many of these changes. Answering those bigger questions and shaping your chart of accounts around them takes a more strategic, forward-looking view. We explain how that differs from reporting on what already happened in our post on why your CPA isn’t answering your big financial questions.

Restructuring financial reporting is a regular part of our fractional CFO services, and it’s one of the first things we look at with new clients.

Download Our Free Example Chart of Accounts

If you’re ready to rework your own accounts, our free Example Chart of Accounts gives you a starting point. It includes a standard numbering system, best practice tips, and a full example chart of accounts you can adapt to your business.

Chart of Accounts Best Practices: Key Takeaways

• Your chart of accounts shapes what your P&L can tell you, and as the owner, you control how it’s set up.
• Separating revenue by service line and identifying cost of goods sold show you what’s driving growth and whether your margin holds up.
• Rolling related expenses, especially people costs, into subtotals puts key numbers on the face of your P&L.
• Keep the P&L summarized and use reports and class tracking for the detail.

Frequently Asked Questions