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The chart of accounts is an essential part of any SaaS startup’s accounting processes—it determines how you categorize transactions and forms the basis of key financial statements. The level of detail you establish in the chart of accounts dictates whether you can generate reports on specific expense and revenue categories or only have high-level financial data.
However, most people outside of the finance team aren’t aware of what the chart of accounts is or how it impacts other financial processes. Let’s take a look under the hood at how a SaaS chart of accounts works.
What is a SaaS chart of accounts?
To understand what a chart of accounts is, you first need to know about general ledger accounts. Simply put, a general ledger (GL) account is a category of transactions. For example, most businesses have a GL account that groups together all their office expenses, another GL account for their payroll expenses, and so on.
A chart of accounts (also known as a COA) is a list of all the GL accounts you use to categorize your business’s transactions.
The design of your startup’s chart of accounts requires a balance between too much and too little detail. How much detail should be presented in the chart of accounts depends on the data needs of the business. However, it is important to remember that it is always possible to aggregate data if you require less detail; should you require more detail than you initially planned for, disaggregating data after the fact is much more difficult and incredibly time consuming. When in doubt, err in the direction of more detail than less.
Below is a sample SaaS chart of accounts.
It’s important to note that every business’s chart of accounts will look different. For example, because SaaS businesses gradually recognize subscription revenue over the course of customer contracts, a SaaS company chart of accounts will include a GL account for deferred revenue as a liability. For other industries, this account may not be necessary.
3 key elements of a SaaS chart of accounts
1. Account names
The name of each GL account describes the transactions that it groups together. You should choose account names that make sense for your business model and are instantly understandable for your finance team. For example, in the sample chart of accounts above, there are eight GL accounts that the business uses to categorize various types of fixed assets:
- Computer & Office Equipment
- Furniture & Fixtures
- Leased Computer Equipment
- Accumulated Depreciation - Computers
- Accumulated Depreciation - Furniture
- Accumulated Depreciation - Leased Computer Equipment
- Intangible Asset - Domain
- Accumulated amortization
For more guidance on managing startup expenses, see: 4 Tips To Optimize Expense Management For Startups.
2. Account types
The COA groups the GL accounts into broad categories known as account types. The account types will be similar for most businesses because they correspond with the key sections in the income statement (also known as the profit and loss statement or P&L) and the balance sheet. Some businesses choose to use more detailed categories, but there are five basic account types:
- Assets—Used in the balance sheet.
- Liabilities—Used in the balance sheet.
- Equity—Used in the balance sheet.
- Revenue—Used in the income statement.
- Expenses—Used in the income statement.
Based on the account type listed in the chart of accounts, software such as QuickBooks will automatically pull the data for each GL account to the relevant section in the financial statements. For example, the eight GL accounts listed in the previous section are grouped into the account type ‘Fixed Assets’. This tells your accounting software to use the data from these accounts in the assets section of the balance sheet.
3. Account numbers
Each GL account is assigned a unique number that allows you to code transactions to the right account. Most SaaS charts of accounts have account numbers between four and seven digits. Using more digits gives you space to add accounts in the future, so if you’re expecting to grow, use at least five digits in your account numbering system.
The first digit in the account number indicates the financial statement and section to which it corresponds. For example:
Your income statement and balance sheet are generated using the information in the chart of accounts and may include the account name, account type, and type detail. For example, the following income statement is generated from the sample chart of accounts shown earlier in this article.
Looking for help building your chart of accounts?
At Zeni, our team of experts has years of experience helping SaaS startups build a financial foundation that supports their growth—including creating and managing the startup chart of accounts. Zeni is a modern, full-service finance firm that provides SaaS startups with outsourced bookkeeping, accounting, and CFO solutions to handle everything from startup budgeting to financial modeling. Zeni’s accountants will help you decide on the level of detail, design a GAAP-compliant chart of accounts, and set it up in your accounting software, so you have everything you need to generate financial reports.
Ready to get professional support with your SaaS accounting setup? Click here to book a call with Zeni.
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