Question 4.15: Assume that you currently run a restaurant in a coastal town...

This could easily be done by simply setting up a second set of ledger accounts relating to the second restaurant, with an income statement for each and the profits or losses from each being then transferred to equity. However, it is likely that, as you expand, you will consider using an accounting package.

The more complicated your business becomes, the more important the chart of accounts becomes. After several years of running the two restaurants, you are looking at further expansion. You have decided that expansion into the holiday rental business might provide a better link with the restaurants than opening more restaurants further away. It could also link with provision of food for conferences and related activities. This would necessitate some different types of accounts and separate reporting, all of which could be done manually, but probably would be better done using an accounting package.

A possible chart of accounts for the business is shown in Table 4.3. The first column includes a reasonable chart of accounts for the single restaurant business. The second column sets out a 4-digit code which could work for this single business. The third column revises the coding system to facilitate separate record-keeping for the second business. The fourth column does the same for the third area of business and also adds some new accounts.

There is no reason to suppose that the type of accounts needed to include the second restaurant would need to change. However, in order to keep track of the second restaurant separately, some means of identification would be needed. This could simply be done by changing a single digit of the code, as shown in the third column of the chart.

When we come to the third area of the business, we need to add some more accounts so as to ensure that we are able to record the information necessary to enable us to see clearly how this section of the business has performed, to provide information which can be used to assess its success, and to identify ways in which improvements can be made. So, the first column includes any extra accounts needed, which are shown in italic, while the fourth column includes new codes for these new accounts and achange in the initial digit of the code to identify the third area of the business. The last three numbers of the code will identify a particular type of account, while the first number will identify which of the three sections of the business a particular transaction relates to.

You should note that the preceding example uses a 4-digit code. This was a quite arbitrary choice. The coding system can take many different forms, but the general approach is very similar, no matter what codes are actually used. What is important is that considerable thought goes into the original chart, so that little needs to be added or changed in the short-term. A complete change in an area of the business, such as in the third area in the example, may well lead to some new accounts and associated codes being required, but if a chart is imaginatively thought through from the outset, and developed alongside a strategic plan, changes should be relatively small. Even the adding of a welldeveloped subsidiary company, as the result of a takeover or acquisition, should be capable of being quickly absorbed within a well-designed chart of accounts.

It would be easy to see the chart of accounts as financial accounting oriented, but this would be a mistake. We shall see in Chapter 7 that the regulations regarding limited companies are considerable, especially regarding the financial accounts. But much of the information required is corporate-level, big-picture information. Some of it relates to segments, but very little of it comes near the detail that we would expect a management accountant (and his or her associated managers) to require in order to assess performance and develop improvement and growth strategies. The development of an appropriate chart of accounts goes to the heart of managing a business. It requires a clear strategic perspective, a detailed understanding of planning and control, and an ability to develop a sound information system.

TABLE 4.3 CHART OF ACCOUNTS AND ASSOCIATED CODING