Guide to Classifying Accounts

Watch this video to get a jump-start on account classification, or dive deeper by reading below:

Classifying Basics

Every single account that gets parsed into CFO Scoreboard needs a classification, else CFO Scoreboard doesn't know what to "do" with it. Accounts classified as Revenue obviously get handled differently than those classified as Expenses, and so on. In order to generate rich and accurate optics for your, the system runs different computations and analyses on different kinds of classifications.

The Classify Accounts screen is accessible in two ways:

1. Whenever you upload and CFO Scoreboard encounters new accounts that it hasn't classified before, it will show the Classify Accounts screen as part of the upload process. If this is your first time uploading, or if you're uploading an entirely new chart of accounts, then the Classify screen will show all of your accounts at once.
2. If at any time you want to view or change your classifications, you can do so by clicking your name in the top right of CFO Scoreboard >> Settings >> Companies >> Find your company in the list >> Actions menu: Classify Accounts. You can view or make changes to this screen as often as you like! Classifications can be changed at will, with some caveats.

Main Classifications

Here's we'll look at the main classifications available, which you'll use for the vast majority of your accounts.

Income Statement Classifications

For each item in the list below we'll explain the purpose of the classification, as well as common terms that may fit into it:

1. Revenue
   All sales, turnover, or inflow of cash into the business, via sale of goods or services rendered.
2. COGS
   Cost of goods sold or cost of services rendered -- the direct cost to the company of product sold, including cost of materials and direct costs of labor for production. This typically does not include indirect costs such as distribution or sales force expenses.
3. Marketing & Sales Expense
   Also sometimes called S&M -- indirect costs such as sales and marketing execution, advertising, promotion, public relations, package design, event planning, travel and entertainment expenses, etc.
4. General & Administrative Expense
   Typically called G&A -- these are expenditures related to the day-to-day operations of a business; the key distinction from COGS is that these expenses are for administration and operations, rather than being tied to direct production of goods and services. General and administrative expenses include rent, utilities, insurance and managerial salaries.
5. Other Income
   Revenue earned outside the core operations of the business. For example, a manufacturer might rent out some of the extra space in their warehouse. Any interest earned on credits can also go here.
6. Other Expense
   Expenses or costs associated with non-core business operations; examples could include start-up costs, regulatory costs or penalties, or anything else unrelated to the main purpose of the business, and doesn't fit well into the other classifications.
7. Depreciation
   As assets lose value over time, an amortized portion of that depreciation gets appropriately divided into the period shown on an income statement; use this classification for any of those recorded losses.
8. Amortization
   Similar to depreciation; but whereas depreciation applies to tangible assets, amortization spreads out costs associated with intangible assets and capital expenses.
9. Interest Expense
   Costs related to borrowing -- interest payable on any type of borrowings – bonds, loans, convertible debt or lines of credit.
10. Income Tax
    Business taxes paid on revenue within this period.

Balance Sheet Classifications

There's a different set of classifications for the Balance Sheet, which we'll list out in a similar arrangement:

1. Cash
   Funds that are immediately available to the business in the form of bank accounts, savings bonds, certificates of deposit, and money market funds. 
2. Accounts Receivable
   Money owed to the company by customers or borrowers in exchange for goods or services that have already been delivered.
3. Inventory
   The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale.
4. Other Current Assets
   A firm's assets that do not include cash, securities, receivables, inventory and prepaid assets, and can be convertible into cash within one business cycle, which is usually one year.
5. Fixed Assets
   Tangible property that a business uses in the process of producing income. To qualify as a fixed asset, the item cannot be consumed or sold in less than a year's time.  Fixed assets are subject to depreciation. 
6. Accumulated Depreciation
   The total loss of value to date on fixed assets and tangible property owned by the business -- equivalent to the sum of all depreciation shown on the profit and loss
7. Net Intangible / Goodwill
   Intangibles are items owned by the business that are not physical in nature; corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies) are a good example. Goodwill is a particular intangible results from of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and so on, can also be represented as goodwill.
8. Other Assets / Investment
   A firm's assets that do not include cash, securities, receivables, inventory and prepaid assets, and cannot be convertible into cash within one business cycle, which is usually one year
9. Accounts Payable
   Debts that must be paid off within a given period of time in order to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks.
10. Tax Payable
    Unpaid taxes that must be settled to the government within one year.
11. Other Current Liabilities
    Debts that must be paid off within the current period that are not otherwise classified appropriately in other categories.
12. Long-Term Liabilities
    Obligations of the company that become due more than one year into the future. Long-term liabilities include items like debentures, loans, deferred tax liabilities and pension obligations. The portions of long-term liabilities that will come due within the next 12 months are listed under current liabilities, such as the current portion of long-term debt.
13. Other Liabilities
    Liabilities that a company must pay but that are too small to record separately on a balance sheet. That is, other liabilities are all miscellaneous obligations that a company lumps together on financial statements.
14. Shareholders Investment / Paid-In Capital
    Money that a company has received from the sale of its shares, or from direct investors, specifically representing money that is not borrowed. 
15. Dividends Paid
    Money paid out of a portion of a company's earnings to its shareholders or investors.
16. Distribution Paid
    Money paid out of a company's capital gains to its shareholders or investors
17. Net Income
    Total revenues for the business, adjusted for the cost of doing business, depreciation, interest, taxes and other expenses. In typical accounting systems, this figure is shown Year-To-Date and is "rolled" into Retained Earnings on the first day of each year, which allows Net Income to start over from zero.
18. Retained Earnings
    The total of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay off debts. In typical accounting systems, Net Income will be zeroed out on the first day of the year, and the total added into the Retained Earnings account.

Special Classifications

While we have noted that the majority of classification types can be used and modified totally at-will, there are two to be very careful with: Total and Heading. Both of these are designed basically to let CFO Scoreboard ignore certain spreadsheet rows that can be safely discarded. Once you set an account to either of these classifications, you will not be able to change, or recover them.

Here's some detail on the rationale behind each classification:

1. Total
   For most accounting systems, when you export a P&L or Balance Sheet, each account group and sub-group will have a line at the bottom of the group that says something like "Total XYZ" or "Net XYZ". While these totals are useful when you're looking at the reports directly, they are NOT something you want CFO Scoreboard to retain during the import process. CFO Scoreboard actually calculates all these totals internally already. So if we were to import them as well as the "regular" accounts during the upload process, CFO Scoreboard would effectively double most of the accounting figures in your statements. Obviously this would be grossly inaccurate.
   
   As a result, CFO Scoreboard will by default totally discard these rows. If it finds account names that start with "Total" and the name matches a previous heading or parent account, then that account will not show on the Classify Accounts Screen. CFO Scoreboard throws it out automatically, and it does not contribute to your numbers.
   
   If however some accounts of yours DO make it through this filtering process and still show up on the Classify Accounts screen, you'd want to classify them as Total. Doing this will ensure that CFO Scoreboard discards them from its computations. However you'll want to make sure NOT to use this classification if you think that you'll need CFO Scoreboard to actually use data from these rows.
2. Heading
   Sometimes the  hierarchy that's included in a spreadsheet is not the kind that CFO Scoreboard can pick up automatically. In these cases you'll see "accounts" on the Classify Accounts screen that are not really accounts, but instead are more like group names or section headers. In these cases you'll want to give CFO Scoreboard a little help and manually classify these accounts as Heading. Doing this produces a similar effect to using the Total classification -- CFO Scoreboard will disregard all the financial information from these accounts. The difference is that whereas Total will make the account completely disappear from the chart of accounts, setting classification to Heading will still show the account in the list, but there will be no drop-down handle next to it, and no data pulled from that row in the spreadsheet.

In both of these cases, whether setting to Total or Heading, the account will disappear from CFO Scoreboard's calculations and analysis. The only way to get these accounts "back" is to rename them as something new in your spreadsheets, and re-uploading the data again. Doing so will force CFO Scoreboard to "ask" for a classification again, since these new accounts will be un-recognized. Keep in mind that all it takes here is to make a one-character change in the account name. Something as simple as adding the suffix "- new" would do it.