Creating a Chart of Accounts for a SaaS Company

TLDR Summary

1. Consider seven or eight main groupings for your accounts based on the accounting system you’re using.
2. Build for flexibility and growth by leaving lots of spaces between the account numbers.
3. Create a section for reconciliation accounts… you’ll thank yourself later.

The Details

As you know, the Chart of Accounts (CoA) is the backbone of the whole accounting department.  Software as a Service (SaaS) companies have a bit of a unique twist that traditional manufacturing or e-commerce companies don’t have.  Planning for these nuances early will save you time later while providing flexibility.  Something to also keep in mind are Stat or Metric Accounts that aren’t really part of the CoA but needed for company or department financial analysis.

What is a Chart of Accounts?

For those less familiar with accounting, a Chart of Accounts (CoA) is a listing of all the accounts a company uses to record its financial transactions, typically broken down into seven main categories:

1. Assets
2. Liabilities
3. Equity
4. Revenue
5. Expenses
6. Other
7. Reconciliation

Each category is further subdivided into more detailed accounts that capture the company’s financial activities.  The CoA should be designed with scalability and clarity in mind.  If you’re using an accounting system that doesn’t really leverage an additional classification for expenses to indicate cost of sales (CoS) or cost of goods sold (COGS is a generic term which doesn’t typically apply to SaaS companies, so not technically accurate – no “goods”, but everyone understands it as common parlance so it’s fine to run with it]), you may want to consider an additional category for Cost of Sales.  That would then be eight main categories.

That eighth category is useful for QuickBooks online, but if you’re using NetSuite you wouldn’t use it.  Also, if you’re migrating to NetSuite, you’re probably not creating a CoA from scratch.

SaaS companies often have complex revenue recognition policies, deferred revenue, high customer acquisition costs, and numerous operational expenses that need to be categorized appropriately.

Key Considerations for SaaS Companies

Before diving into the CoA structure, let’s highlight some key considerations that are specific to SaaS companies:

1. Presentation to various audiences: You’ll definitely have the present and share these financial statements with various different audiences.  Those audiences include:
   1. Company Leadership will expect to use these to help manage the company.  You’ll want to consider what level of detail they require.  Some will want a lot of details, while others will be overwhelmed with the details.  For example they may only be interested in cash flow, revenue, headcount spend and travel spend.
   2. Department Leaders will want to know their revenue or spend numbers.  You need to consider what information is appropriate for their eyes.  For example you may always hide the equity section when providing them financial information.
   3. Investors or Potential Investors may be less interested in the specific details but want summarized groupings.  We’ll cover that in another article.
   4. Banks, especially those you have debt with, may want the financial statements.
   5. Customers, especially larger enterprise companies will want to know the details of those with whom they’re getting into business.  A business may be hesitant to rely on an unstable company for a core part of their business processes.
   6. Vendors that extend credit may have steps to ensure their customers’ creditworthiness.

2. Revenue Recognition: SaaS companies typically have recurring revenue streams from subscription-based services. Revenue recognition for these subscriptions is often spread over time, meaning that a proper distinction between deferred revenue and recognized revenue is crucial.  See ASC 606.
3. Gross Margin: SaaS companies should typically have a fairly high gross margin… anywhere from 60% to 90%.  It’s a key aspect to managing the business.  That requires a cost of sales category of accounts to highlight that margin.
4. Customer Acquisition Costs (CAC): SaaS companies often invest significantly in sales and marketing to acquire new customers. These expenses need to be tracked carefully to assess the profitability of customer acquisition efforts.
5. Recurring vs. Non-recurring Revenue: SaaS companies may generate revenue from subscriptions (recurring) and professional services (non-recurring). The CoA should differentiate between these revenue streams for better financial analysis.
6. Deferred Revenue: When customers pay upfront for annual or multi-year subscriptions, revenue cannot be recognized all at once. Instead, it’s recorded as deferred revenue and recognized over the life of the contract.
7. Key SaaS Metrics: SaaS companies focus on metrics like Monthly Recurring Revenue (MRR), Customer Lifetime Value (CLTV), and Customer Churn. While these are not directly recorded in the CoA, a well-structured CoA should facilitate reporting that enables the calculation of these metrics.

Structuring the Chart of Accounts for a SaaS Company

Here’s a structure for a a SaaS company CoA, ensuring that all essential financial activities are captured and categorized appropriately.  This is going to assume a QuickBooks style accounting system and thus have the CoS accounts separated out.  Also, I’d recommend starting with four (4) account numbers syntax.  Four account numbers will provide enough flexibility without overwhelming with more complexity.  Also, if you ever migrate to another system, you could just add a zero to the end of the account numbers to clearly indicate the transfer to another system in the accounting records.

Assets (1000 accounts)

SaaS companies, like any other business, will have both current and long-term assets. However, they may have more intangible assets (such as intellectual property and software) than physical assets.

– **Cash and Cash Equivalents (1000–1099)**: 

  – 1001: Operating Account

  – 1002: Payroll Account

  – 1003: Petty Cash

– **Accounts Receivable (1100–1199)**: 

  – 1101: Accounts Receivable

– **Prepaid Expenses (1200–1299)**: These could include software subscriptions, insurance, or other prepaid expenses.

  – 1201: Prepaid Software Subscriptions

  – 1202: Prepaid Insurance

– **Deferred Contract Costs (1300–1399)**: SaaS companies often need to defer the costs of acquiring a customer, like commissions or professional services. These should be capitalized and amortized over the life of the customer contract.

  – 1301: Deferred Commissions

  – 1302: Deferred Implementation Costs

– **Intangible Assets (1400–1499)**: 

  – 1401: Capitalized Software Development Costs

  – 1402: Patents and Trademarks

Liabilities (2000 accounts)

SaaS companies have a unique relationship with liabilities due to their deferred revenue, which is often one of the most significant liability accounts on the balance sheet.

– **Accounts Payable (2000–2099)**: 

  – 2001: Accounts Payable

– **Accrued Expenses (2100–2199)**: 

  – 2101: Accrued Salaries

  – 2102: Accrued Commissions

– **Deferred Revenue (2200–2299)**: This is critical for SaaS companies. Deferred revenue reflects payments received for services not yet rendered.

  – 2201: Deferred Revenue (Current)

  – 2202: Deferred Revenue (Non-Current)

– **Sales Tax Payable (2300–2399)**: If the company is required to collect and remit sales tax on its SaaS products or services, this needs to be tracked.

  – 2301: Sales Tax Payable

Equity (3000 accounts)

Equity accounts reflect the ownership interest in the company. For SaaS companies, you may need to track stock-based compensation, as this is a common form of employee compensation.

– **Common Stock (3000–3099)**: 

  – 3001: Common Stock

– **Additional Paid-In Capital (3100–3199)**: 

  – 3101: Additional Paid-In Capital

– **Retained Earnings (3200–3299)**: 

  – 3201: Retained Earnings

Revenue (4000 accounts)

This is where the complexity of a SaaS company’s CoA comes into play. Revenue should be broken down into several subcategories to capture different revenue streams and ensure compliance with revenue recognition standards.

– **Subscription Revenue (4000–4099)**: Recurring revenue from software subscriptions.

  – 4001: Monthly Subscription Revenue

  – 4002: Annual Subscription Revenue

– **Professional Services Revenue (4100–4199)**: Non-recurring revenue from consulting, setup, or customization services.

  – 4101: Implementation Services

  – 4102: Consulting Services

– **Deferred Revenue Adjustments (4200–4299)**: For recognizing revenue over time from deferred revenue accounts.

  – 4201: Revenue Recognized from Deferred Revenue

Cost of Sales (5000 accounts)

Cost of sales accounts should be separated so you can calculate the gross margin on the face of the income statement without too much trouble.  Cost of sales at a smaller SaaS company may or may not include the headcount costs of customer support.  If customer support is handled by engineers or sales people, it may not make practical sense to separate out a portion of their headcount expenses to populate those cost of sales accounts.

– **Cost of Goods Sold (5000–5099)**: These are direct costs associated with delivering the SaaS product.

  – 5001: Hosting and Infrastructure Costs

  – 5002: Customer Support Costs

Expenses (6000, 7000 accounts)

Traditionally, I have reserved 6000 accounts for general company spend accounts and 7000 accounts for sales, marketing and travel spend accounts.  With a QuickBooks similar accounting system, you’ll want to use the “class” aspect to breakout spend by departments.

– **Headcount Expenses (6001–6199)**: This category captures the costs of employees.

  – 6010: Wages

  – 6020: Payroll Taxes – Employer (ER)

  – 6030: Commission – Sales

  – 6040: 401K Contributions – ER

  – 6050: Health Insurance

– **General and Administrative Expenses (6200–6499)**: Typical overhead expenses such as office rent, insurance, and other administrative costs.

  – 6205: Office Rent

  – 6210: Accounting Fees

  – 6215: Legal Fees

  – 6220: Software

  – 6490: Small equipment (so you don’t have to capitalize everything)

-** Travel Expenses (7001-7099)**: This category captures the costs of travel, predominantly for the sales teams, however as other departments travel, you’ll have to capture these expenses by departments.

  – 7005: Airfare

  – 7010: Hotel

  – 7020: Transportation

  – 7030: Travel Meals

-** Other Sales and Marketing Expenses (7101-7199)**: This category captures the costs of travel, predominantly for the sales teams, however as other departments travel, you’ll have to capture these expenses by departments.

  – 7105: Advertising

  – 7110: Sponsorships

  – 7120: Conference Attendance

Other Income and Expenses (8000 accounts)

SaaS companies may have interest income, interest expense, and other non-operating activities that should be recorded separately.

– **Other Income (6000–6099)**: 

  – 6001: Interest Income

– **Other Expenses (6100–6199)**: 

  – 6101: Interest Expense

Reconciliations (9000 accounts)

Reconciliation accounts help with getting the books closed.  When the books are closed, all these accounts should have zero balances.  Transactions involving credit cards, payroll or revenue recognition often leverage temporary accounts to get them booked efficiently during the course of the month.  That’s what these accounts are for.

– **Reconciliation Income (9000–9099)**: 

  – 9001: Revenue Reconciliation

  – 9005: Deferred Revenue Reconciliation

– **Reconciliation Expenses (9100–9199)**: 

  – 9101: Payroll Reconciliation

Flexibility and Scalability

One of the most important aspects of designing a CoA for a SaaS company is ensuring that it can scale as the business grows. As the company adds new products, services, or revenue streams, the CoA should be able to accommodate these changes without a complete overhaul.

Additionally, the CoA should be flexible enough to handle different accounting frameworks, such as GAAP or IFRS, as the business may need to report under different standards depending on its operations and geographic footprint.

Conclusion

A well-designed Chart of Accounts is vital to the financial health and reporting accuracy of any SaaS company. By taking into account the unique revenue models, deferred revenue, customer acquisition costs, and key SaaS metrics, you can create a CoA that not only ensures compliance but also provides valuable insights into business performance.

As the company grows, it’s essential to periodically review and adjust the CoA to ensure that it continues to meet the needs of the business and facilitates accurate financial reporting.