Chart of Accounts

From AAUP-Wiki

Introduction

The chart of accounts is the grouping of various accounts with similar characteristics used to present the financial picture of an organization. The two key instruments for analyzing a business are the balance sheet and the operating statement, often called the profit and loss (P&L) statement.

The balance sheet reflects the financial position of an organization at a certain point in time. The profit and loss statement measures the performance of an organization over a period of time.

Because of their small size some organizations may not see the need for a balance sheet. Without it, certain trends that may adversely affect the business may go unnoticed, such as increasing levels of inventory, accounts receivable, and accounts payable. It is extremely important to be in a position to monitor these critical areas on an ongoing basis.

Before we enumerate the various accounts needed in an organization, a brief discussion of the importance of numbering for the chart of accounts is necessary. For purposes of this illustration it will be kept simple, as the development of a numbering system can become quite detailed, depending on the needs of the organization. It is critical that management decides what information is wanted and how it is to be presented when developing the numbering system. Larger presses may want to consider an eight-digit account number, whereas smaller ones may be able to adequately segment their accounts with six digits or fewer.

An illustration of a possible account number structure is presented below. The balance sheet and its appropriate accounts will be presented first. It should be remembered that the accounts indicated below are intended as a guide and are not cast in stone, since an organization may have certain accounts that are unique to its operation.

The balance sheet consists of three basic types of accounts: assets (and their contra accounts: <offsets to properly value the asset account>), liabilities, and capital or equity. Outlined below is a listing of accounts by the major categories included on the balance sheet.

Balance Sheet

Below is a possible numbering system using an eight-digit account number, followed by the function of each number. A numbering system such as this will enable you to group accounts and formulate your financial statements according to your needs.

Digit 1 – Type of Account

Assets Liabilities

Digits 2 and 3 – Type of Asset or Liability

Cash Accounts Accounts Receivable Property Plant & Equipment Accounts Payable Accrued Expenses Digits 4, 5, 6, and 7 – Specific Balance Sheet Account

Petty Cash Royalties Payable Digit 8 – Division or Business Segment

Reference Book Division Balance Sheet Accounts

Current Assets

Cash: Bank Accounts Short Term Investments < 1 year Petty Cash Accounts Receivable:

Accounts Receivable – Trade <Reserve for Doubtful Accounts > <Reserve for Future Returns > Accounts Receivable – Investment Interest Accounts Receivable – Journals Accounts Receivable – Employees Accounts Receivable – Others Inventories: Bound Book Inventory < Reserve for Inventory Write-down > < Reserve for Inventory Shrinkage > Paper Stock Sheet Stock Work in Process Other Assets

Prepaid Expenses Author Advances <Reserve for Royalty Advance Write-offs > Loans Receivable Long-Term Investments

Investments >1 year Property Plant & Equipment

Land Buildings <Accumulated Write-off – Buildings > Building Improvements <Accumulated Write-off – Building Improvements > Warehouse Equipment <Accumulated Depreciation – Warehouse Equipment > Leasehold <Accumulated Leasehold Write-off > Leasehold Improvements <Accumulated Write-off – Leasehold Improvements > Computer Equipment <Accumulated Depreciation – Computer Equipment > Furniture & Fixtures <Accumulated Depreciation – Furniture & Fixtures > Automobiles <Accumulated Depreciation – Automobiles > Current Liabilities

Accounts Payable – Trade Accounts Payable – Other Accrued Salaries Accrued Vacations Royalties Payable Accrued Expenses Taxes Payable Deferred Income – Journals Deferred Subsidies Long-Term Liabilities

Reserve for Post-retirement Benefits Mortgage Payable Revolving Funds Endowment Funds Equity

Operating Fund Balance – Opening Balance Operating Fund – Current Year Results Profit and Loss Statement

The operating statement (profit and loss statement) consists primarily of two types of accounts: revenues and expenses. The primary source of revenues is derived from the sale of books and, in some presses, from the sale of journal publications. A secondary source of income is derived from the sale of subsidiary rights, such as translation rights, permission fees, serial rights, and book club sales.

Operating expenses are best defined as the expenses incurred by the various functional areas of the organization, such as the editorial, production, and marketing departments. The operating expenses chart of accounts will be presented primarily in the order of the financial operating statement, which is basically the format used in the annual AAUP statistical survey, beginning with revenues and followed by the operating expenses of the various functional areas found in a university press environment.

Digit 1 – Type of Account

Sales & Related Accounts Cost of Sales Operating Expenses Other Income/Expense Digits 2 and 3 – Functional Area or Department in Organization

Editorial Department Digits 4, 5, 6, and 7 – Expense Category

Travel & Entertainment Digit 8 – Business Segment

Reference Book Division Profit and Loss Accounts

Revenues

Gross Sales – Press-Owned Books Gross Sales – Commissioned Books Sales Adjustments Sales Returns Charge for Future Returns Cost of Goods Sold

Paper, Printing & Binding (PP&B) Inventory Write-down Expense Plant Costs Royalty Expense Royalty Advance Write-off Expense Commission Book Proceeds Other Publishing Income

Translation Rights & Royalties Reprint Royalties Permission Fees Serial Rights Electronic & Audio Rights Book Club Sales Income/Advertising Income Operating Expenses

Editorial Acquisitions

Salaries Personnel Recruiting Readers Fees Free Copies – Inventory Value Free Copies – Postage Series Editors Expenses Travel & Entertainment Dues & Subscriptions Postage Reference Materials All Other Copy Editing

Salaries Personnel Recruiting Personnel Development Freelance Copy Edit – Fees Freelance Copy Edit – Expenses Freelance Production Freelance Proofreading Fee Freelance Proofreading Expenses Travel & Entertainment Postage All Other Production & Design

Salaries Personnel Recruiting Personnel Development Packagers – Copy Edit Freelance Art Supplies Design Show Fees Reference Materials Travel & Entertainment Postage Sheet Stock & Film Storage Costs All Other Marketing & Sales

Salaries – Marketing Salaries – Sales Personnel Recruiting Sales Commissions Travel & Entertainment Exhibits Expense Co-op Advertising Direct Mail Catalogs & Trade Advertising Web-site Development & Maintenance Freelance Expenses Free Copies – Inventory Value Free Copies – Postage All Other Note: Whether the cost of free copies should be included as a departmental expense or should be shown in the cost of goods section is open to debate. It is the opinion of this writer that it should be included as a departmental expense, thereby providing departmental accountability for a major expense item. When accounting for free copies, it might also be beneficial for inventory and postage costs to be captured separately. Since postage accounts for a significant portion of the total cost of free copies, you may want to evaluate or prioritize your shipping methods for various types of free copy requests to minimize shipping costs; for example, a free copy request received from an individual may be shipped by fourth-class postage rather than by priority mail.

Order Fulfillment (Internal)

Salaries – Order Processing Salaries – Customer Service Salaries – Credit & Collection 800 Toll Lines Bad Debts & Collection Expense Credit Card Fees Other Equipment & Supplies

Non-Capitalized Computer & Equipment Purchases Depreciation of Computer Forms, Supplies & Stationery Warehouse and Shipping

Salaries Shipping Supplies Occupancy Costs

Rent Building Depreciation Real Estate Taxes Mortgage Interest Utilities Maintenance & Repairs Waste Removal All Other Equipment

Depreciation Equipment Rentals Equipment Maintenance Equipment Repairs Transportation Charges

Shipping Charges Out Shipping Charged to Customers Note: Make sure that shipping charges incurred on shipments to customers are fully recovered to avoid ending up in a net shipping expense position.

General Accounting and Administrative Expenses

All expenses that are general in nature to the operation of the organization and cannot be assigned to one of the aforementioned functional areas in the organization are to be classified as general and administrative expenses. There are, however, certain items that may be departmentalized, such as employee benefits. It may be beneficial, when trying to determine the total cost of an operation in the organization, to allocate these costs to the various departments by some means, such as by using a percentage based on head count or by making a more accurate allocation based on actual payroll charges. It should be noted that the charging of employee benefits to general and administrative expenses is the most prevalent method.

Employee Benefits

Salaries Accrued Vacation Provision Health Insurance Costs Pension Expense Payroll Taxes Workmen’s Compensation Unemployment Insurance Employee Tuition Reimbursement Employee Assistance Programs Post-retirement Benefits Occupancy Costs (Excluding Fulfillment)

Rent Expense Mortgage Interest Depreciation of Buildings Depreciation of Leasehold & Building Improvements Real Estate Taxes Utilities Building Maintenance & Repairs Other General and Administrative Costs

Non-Capitalized Computer & Equipment Purchases Electronic Data Processing Costs Telephone & Fax Supplies Professional Fees Postage Copying Costs Membership Fees General Insurance, such as Building, Inventory, Autos Depreciation of Computer Equipment Depreciation of Furniture & Fixtures All Other Non-book Publishing Income/(Expense):

Institutional Support Non-parent Operating Grants Endowment Income Investment or Interest Income/(Expense) Net Income/(Loss) – Journal Programs Sales Distribution Income Journals

Some university presses, as part of their operation, engage in the publishing of journals. The accounts indicated below are intended as a guide for setting up the chart of accounts in connection with this activity. If an organization has a journals operation, the accounts indicated below should be incorporated into the main chart of accounts under a separate profit center so the net results can be shown in the non-book publishing income/(expense) section of the operating statement.

Balance Sheet

In addition to the normal accounts reflected on a balance sheet, one of the key accounts that should be reflected in connection with a journals operation is Unearned Subscriptions, also called Deferred Income. This account is important because it holds deferred income on the balance sheet until the journal, for which money has been previously received, is published.

Profit and Loss Statement

Revenues

Subscription Income Advertising Income List Rental Income Royalties/Permission Fees Income All Other Cost of Sales

Composition, Printing & Binding Provision for Inventory Write-down Paper Costs Domestic Postage Foreign Postage Operating Expenses

Editorial Salaries Freelance Expenses Travel & Entertainment Advertising/Promotion Expenses List Rentals Commissions Supplies Postage & Courier Expense Outside Fulfillment Expense Overhead Allocation