Financial Cartography: the 🎨Art🎨 of ChARTing Accounts

Imagine this common insurance agency scenario: your agency receives a statement for $5,000 in direct bill commission. At the bottom of that statement, you see there is also a $500 charge in MVR fees.  Are you simply entering the net $4500 as revenue? Or are you tracking $5,000 revenue and $500 expense?

There is no wrong answer. You can do either.

But here is the beginning of how bookkeeping is an art form. There is subjectivity, interpretation, and implication with a lot of bookkeeping and accounting decisions.

Both of these scenarios net to the same deposit ($4500). But booking both the revenue and expense:

  • provides more clarity to stakeholders,
  • books more revenue, and of course,
  • Scales better as your business grows. It makes your bookkeeper’s life much easier when they are trying to match a commission statement to a bank deposit! Across a large set of scenarios, this may mean a lot to you. 

Today, we’re talking “Chart of Accounts”. Boring for most. Not for some. But hopefully we can make it a little less boring via describing the practicality and significance. The effects these decisions can have on how you (and/or others) could view your agency’s financials are significant.  From what you should pay attention to when naming your general ledger accounts to how structuring all of this impacts your ability to track and report, there is a story to tell. And you should care about telling it! 

What is a Chart of Accounts?

Accounting is often considered the language of business. It allows organizations to systematically record and report (ie, communicate) their financial transactions. To facilitate this process, accountants use a fundamental tool known as the Chart of Accounts. The Chart of Accounts is an essential component of any accounting system.  If the Double Entry bookkeeping method is the GPS of accounting, then the Chart of Accounts is the atlas (yes, we are going to keep throwing out the analogies). 

A Chart of Accounts is a structured list of all the accounts used by an organization to record its financial transactions. These accounts are categorized and organized to reflect the financial structure and operations of the business. The Chart of Accounts typically includes various types of accounts, such as revenues, marketing expenses, IT expenses, loans, and accounts receivables. Each account is assigned a descriptive name, allowing for easy identification and classification of financial data.

One of the primary functions of a Chart of Accounts is to provide a systematic framework for organizing financial data. Without this structure, it would be incredibly challenging to record, retrieve, and analyze financial information. The Chart of Accounts helps in categorizing transactions into relevant accounts, making it much easier to manage and review the financial health of the organization.

Insurance Agency Specific Chart of Accounts

As we have seen above, the Chart of Accounts is an indispensable tool in accounting and financial management—especially for an insurance agency.  As mentioned in previous articles, the complexity of financial transactions increases with agency size as well as fiduciary balances.  

And there are trade-offs. The more detailed your COA, the deeper your insights into specific aspects of your financials. However, this can also lead to complexity – and sometimes an unmanageable level of complexity. It’s best to start simple and revisit as needed. The most important thing is consistent treatment. Here are some examples of the COA structures that an agency can use. A basic COA for any insurance agency should consider and accommodate the following: 

Revenue:  

How do you want to see and analyze your agency revenue?  Agencies can opt for a single income account that all commissions and fees report, or you can break out your revenue in more meaningful ways such as Personal and Commercial, Agency Bill and Direct Bill, Life & Health and Property & Casualty, Commissions and Agency Fees, etc. 

Expenses: 

While an insurance agency has expenses common to every business (rent, utilities, payroll), there are some additional expenses unique to our industry.  These include expenses such as MVR/underwriting fees, producer expenses, E&O insurance, continuing education, and automation software. Organizing these expenses in a way that properly captures and reports these expense categories is crucial, as opposed to lumping them together in high-level, generic accounts. 

Trust asset and liability accounts:  

An insurance agency doesn’t carry normal receivables and payables balance—they are unique as they are fiduciary/trust funds and have to be accounted for in a way that most non-industry bookkeepers and accountants aren’t sure how to handle.  All customer funds should route through the Balance Sheet—not the Income Statement.  The only funds in trust that should show up on your Income Statement are your earned retained commissions. 

Some of you may have heard of, bumped into, or wake up in the middle of the night swearing that you’re going to do something about a category called Deferred Accounts Receivable. 

The significance of a well-structured Chart of Accounts cannot be overstated, as it enables compliance with regulatory requirements, supports informed decision-making, and enhances financial transparency. In today’s complex and dynamic business environment, maintaining a robust Chart of Accounts is not just a best practice but a necessity. It empowers organizations to effectively manage their finances, monitor performance, and make strategic decisions that can lead to long-term success. As the nervous system of financial reporting, the Chart of Accounts is a fundamental aspect of accounting that every business should prioritize and invest time in developing (or updating) and understanding.

A Brief History

The history of the Chart of Accounts can be traced back to the early origins of accounting and bookkeeping practices, which have evolved over thousands of years. The concept of a structured system for recording financial transactions and organizing accounts can be seen in various forms throughout history. Over time, the need for a structured classification system for accounts became evident. Accountants and bookkeepers began to categorize accounts into groups, such as assets, liabilities, equity, revenues, and expenses. This categorization laid the groundwork for what would later become the Chart of Accounts.

Accounting practices can be traced back to ancient civilizations such as the Sumerians, Egyptians, and Babylonians, who used cuneiform script and early forms of ledger systems to record financial transactions. These early records included entries for assets, liabilities, and expenditures, but they were not as organized as modern Chart of Accounts.

The modern system of double-entry bookkeeping, attributed to Luca Pacioli in his 1494 work “Summa de arithmetica, geometria, proportioni et proportionalita,” marked a significant advancement in accounting. This system introduced the idea of recording transactions with both a debit and a credit entry, ensuring that debits equaled credits, and providing a foundation for structured financial reporting. These changes made the Chart of Accounts more important than ever; debits and credits were posted to various accounts on the Chart of Accounts, and a full picture of the business came into focus. For the first time, a business could create a Balance Sheet.

The history of the Chart of Accounts reflects the evolution of accounting practices from rudimentary record-keeping in ancient civilizations to the highly organized and standardized systems in use today. As businesses and financial practices have become more complex, the Chart of Accounts has adapted to meet the needs of modern accounting, financial reporting, and regulatory requirements. Its historical development showcases the enduring importance of structured financial record-keeping in the business world.

 

 

 

About Crystal Temple

Crystal has spent nearly two decades focused exclusively on accounting and bookkeeping for insurance brokers. She has founded multiple bookkeeping groups, one of which was acquired by a prominent AMS provider. Crystal has also served as a controller of an agency group that acquired over 50 agencies in a two-year timeframe. She is the co-founder of a startup called Ricono, building a platform to address some of the technology deficiencies brokers face when trying to measure and manage their financial operations.

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