Start from the questions, not the list
A chart of accounts is the list of buckets the ledger sorts every transaction into. Copied from a template, it often ends up with hundreds of accounts nobody uses and none of the splits the owner actually asks for. Start instead from the questions the statements must answer each month.
For a distributor these are usually the same few, and every account should help answer one of them.
- What gross margin does each product line earn?
- What do the vans, reps and deliveries cost?
- How much do customers owe, and how much of it is overdue?
- What is the stock worth, and what has been received but not billed?
- What do we owe suppliers and the tax authority?
TipWrite your questions on one page and test every proposed account against them; an account that answers none can go.
Lay it out from the statements down
Every chart follows the same five groups: assets, liabilities, equity, revenue and expenses. Inside each, use parent accounts for the lines that appear on the statements and child accounts for the detail beneath them. The statements then print the parents, and anyone who needs more can open the children.
Give each group its own number range, such as 1 for assets and 5 for expenses, and leave gaps between accounts so new ones fit in order later. A number that tells you the group at a glance saves time on every journal.
The accounts a distributor cannot do without
Some accounts carry the daily flow of a distribution business, and each has a record behind it that it must agree with. Set these up first and treat them as control accounts: they should be fed by documents such as invoices, bills and stock movements, not by hand-typed journals.
- Trade receivables, agreed with open customer invoices.
- Trade payables, agreed with open vendor bills.
- Inventory, agreed with the stock valuation.
- Goods received not invoiced, for stock received before its bill.
- VAT on sales and VAT on purchases, kept apart.
- Cost of goods sold, posted by every stock issue.
- Cash for each van or till, and one account for each bank account.
TipAgree in your own procedures that nobody types a journal into a control account; every manual entry there is a difference waiting to be found at month end.
Keep the detail out of the chart
The fastest way to wreck a chart is to open an account for every branch, van or customer. Customers and vendors already have their own records, the subledgers, so one receivables account and one payables account are enough. Branches, routes and departments belong in cost centres, a tag on each journal line, not in the account list.
With cost centres, one fuel account reports fuel for the whole company, and the same report splits it by branch when you ask. Adding a branch means adding a tag, not a dozen accounts.
Revenue and cost of sales in matching pairs
Gross margin is the figure a distributor lives on, so the chart should show it by product line. Split revenue into the few lines that matter, such as beverages, snacks and household goods, and give cost of goods sold the same split. Each pair then gives a margin straight off the income statement.
Keep discounts and returns visible too. A separate account for sales returns and one for discounts given show how much of the list price you really keep, which a single net revenue line hides.
TipDraw the revenue lines the same way your item categories are grouped, so every sale has one obvious line to land in.
Opening balances and the cut-over
Move to the new chart at the start of a period, ideally a fiscal year, so the year’s figures sit in one system. Bring across balances, not history: one opening journal for the trial balance, plus the open items behind each control account, so they can be collected, paid and agreed.
- Choose the cut-over date at the start of a month.
- Map every old account to a new one, and keep the map.
- Take the old system’s trial balance as at the day before.
- Load the open customer invoices, the open vendor bills and a counted stock figure.
- Post the opening journal and check that debits equal credits.
- Compare each control account with its open items before the first sale.
TipCount the stock the night before the cut-over, so the opening inventory figure is a count and not an estimate.
Checklist: Chart of accounts checklist
- Write the questions the statements must answer
- Give each of the five groups a number range
- Use parent accounts for statement lines
- Set up the control accounts first
- Feed control accounts only through documents
- Use cost centres for branches and routes
- Split revenue and cost of sales by product line
- Map old accounts to new before the cut-over
- Check opening balances against their open items