Chart of Accounts Special Transactions (#347)

Organization of the Chart of Accounts

How should you organize a chart of accounts to separate out non-recurring items and non-taxable items? In essence, how should you store all of those residual, non-conforming transactions in the general ledger? What we’re talking about here is the much less than one percent of total transactions that don’t readily fall into an existing, standard account.

For example, you might want to record a tax credit that’s only going to be recorded once, because it’s only allowed under a tax law that will last for just one year. Or, maybe the company has an extremely unusual one-time expense, like rebuilding after a plague of termites. Where do you record it? And the same goes for a very unusual one-time gain, maybe from an insurance claim when a falling satellite took out a production facility. Where do you record that?

Miscellaneous Accounts

There are some options. The simplest approach to very rare revenue and expense items are the good old miscellaneous revenue and miscellaneous expense accounts. This can be a good choice when you only have a few unusual transactions per year that don’t slot in anywhere else. The problem is that they can turn into a dumping ground, where too much gets stored, and then it can be difficult to find them again.

A better approach is to set up a cluster of these miscellaneous accounts, with each one targeted at something a bit different. For example, you could have a miscellaneous non-taxable revenue account, as well as a miscellaneous services revenue account, and maybe another one for miscellaneous revenue from reworked goods. The best way to figure it out is to go over what kinds of miscellaneous revenue transactions have occurred over the past couple of years, and set up appropriate accounts for them, in retrospect.

The same approach goes for expenses. Chances are, you’ll end up with a small cluster of highly targeted miscellaneous expense accounts, each of which stores a very specific kind of transaction.

This approach might seem excessively fussy, but it can be quite useful when you’re dealing with a rather large amount of these odd transactions. Obviously, if you’re not, then don’t bother with the extra accounts – you’re just bulking up the general ledger for no reason.

An adjacent issue is whether you’re specifically trying to store non-taxable items in certain accounts. If you are, then you can adjust the formatting of the financial statement report writer in your accounting software to create a special version of the income statement that only includes taxable items. This can be really useful, but keep in mind that you have to keep track of which accounts are being excluded from the income statement, because you might forget, and end up with some inaccurate profit and loss information.

A good way to remind yourself that an account is being excluded from the income statement is to say so right on the name of the account. For example, you could include the word “Excluded” or “Not Reported” in the name – maybe in caps – so it’s really obvious.