How to Prepare a Crypto Chart of Accounts

Hello Curious Accountants 👋

Today we are going to be discussing the importance of as well as methods of setting up an appropriate chart of accounts for a company that trades with digital assets within their accounting system. 

Today’s topic is broken down as follows:

• Charts of accounts 101 
• Creating a chart of accounts in an accounting software 
• 3 options for how to set up a chart of accounts.
• Best practices
• How sub-ledgers assist

Charts of Accounts 101 - Building a strong foundation 🧱

A well-structured Chart of Accounts (COA) is crucial for any company, as it provides a clear framework for organising financial transactions. A COA is simply a list of all financial accounts, grouped into categories, such as assets, liabilities, equity, income, and expenses used for recording transactions in the company’s general ledger.

Essentially, it's the backbone of a company's financial health, as it provides you an overview of every area of your business that spends or makes money.  If you are currently transacting in crypto, having your chart of accounts set in the right way from the get-go will save you hours of constant back-and-forth tweaking in the long run. 

This emphasises the fact that the setting up of the chart of accounts is not a ‘one-size-fits-all’ for companies but rather takes company-specific characteristics into account and requires thorough thought and logic from the finance team. 

Creating Chart of Accounts in accounting software ✍️ 

The chart of accounts would be broken down into the elements of the financial statements i.e. asset, liability, share capital, income, and expenses. 

Some typical crypto-related accounts would fall under these elements:‍

• Asset - Crypto held within a wallet or on an exchange, crypto assets staked within a staking pool or provided to a liquidity pool (this is because the wallet which was used to provide the assets no longer controls the assets and thus these are treated as receivable);
• Liability - Crypto borrowings, crypto payables, and deposits by customers to the company;
• Income - Staking rewards, mint income, grant income and unrealised gains, etc;
• Expenses - Gas fees, cost of sales, grant expenses, payroll and impairment losses, etc.

The finance team would be able to assess the wallets, contracts, and accounts in accordance with these elements. The elements would then be further assessed on their type for the specific account i.e. intangible assets for crypto wallets, other current assets for staked assets receivable, and other current liabilities for client funds. 

Currently, the most common accounting softwares such as Xero, Quickbooks, and Netsuite do not have the ability to directly integrate crypto wallets and exchanges into the system, such as in the case of the bank feed. This means we would need to account for crypto transactions either manually or through the use of a crypto sub-ledger (see more on this below).

An additional aspect to keep in mind when one is reconciling the balances in their accounting system against the wallet is that accounting systems are created to have 2 decimal places whereas crypto wallets have 18 decimal places, therefore, there could be slight rounding differences. 

Practical examples of setting up a chart of accounts in an accounting software

It is noteworthy to mention that crypto wallets would not have the same feature as bank accounts within accounting softwares such as Xero and Quickbooks etc to be connected via bank feeds. The wallets also do not meet the definition of bank accounts and thus would need to be a new separate account within the COA. 

Let us break down a simple example of a company that has 3 wallets and transacts with 2 assets (ETH and USDC) on the Ethereum chain. The wallet balances were as follows:

And now, let’s look at 3 possible options to set up the chart of accounts.

[fs-toc-h2]1st Option: Group assets by individual token holdings 

This option would be to create accounts for ETH and USDC respectively. This would then allow the finance team to make assessments and decisions on an asset-by-asset basis. 

[fs-toc-h2]2nd Option: Group assets by wallets

This method assigns an account to a wallet and groups all assets within this wallet into one account. This approach is seen in practice, although for companies that deal with a variety of tokens within each wallet, this method gives less visibility and overview into the individual assets.

[fs-toc-h2]3rd Option: Group assets by wallets and individual token holdings 

The finance team would separate the wallets as well as their assets in this method. This would be useful when you would have departments or projects which are funded through certain assets. The scalability of this method in terms of the number of wallets and assets within each wallet needs to be assessed by the team.

The 3rd option allows for the finance team to have a way of analysing the data in an asset-by-asset form as well as a wallet use case form, should they have a key for the wallets themselves. The individual wallets could be part of the finance or development team for instance, separating the chart of accounts into the wallets as well as their assets would allow for better departmental analysis and even easier tracking of development costs for research and development purposes.

For demonstration purposes, below shows a crypto wallet being added to Xero with the account type being a current asset rather than a bank account connection with bank feed and following the option 3 methodology of COA setup. 

Best Practices 🎖️

Different types of crypto assets have different purposes for holding and value sources, and need to be measured according to different accounting standards, thus highlighting the need to have a chart of accounts that can scale and also be granular enough for the business reporting needs. 

The recent release of the FASB guidance for accounting for digital assets with the fair value model for instance, requires the finance team to make a distinction between assets and record certain assets at fair value and others (such as wrapped tokens or the entity’s own native token) at cost less impairment losses. Therefore, provision within the setup of the chart of accounts would need to be made for these balance sheet impairment loss accounts as well as for the fair value increase/decrease through OCI for the assets that are measured at fair value. 

A good set of accounts would follow a logic, applied across all entities within the group for assistance in consolidation and would allow for the future growth of the company or any adaptations in the reporting requirements related to the company's digital assets.

A framework for account codes according to nature is good practice and allows an added level of clarity for the finance team. A very basic example of this could be as below:

A company could take the lessons from above and arrange the accounts that require fair value and cost to be grouped respectively and allow for ease in the analysis of fair value versus cost at year-end and better show impairment losses brought forward. 

How sub-ledgers assist 

Crypto sub-ledgers such as TRES, Cryptoworth, Bitwave, Cryptio, Consola Finance amongst others are recommended for the accounting of digital assets. 

These tools, each in their way and method, would allow you to integrate your on-chain activity into your accounting software with greater ease. Through importing wallets, labeling transactions, mapping wallets, and creating journal rules, the sub-ledgers would be able to record your crypto activity to fit your business’s chart of account requirements. They can understand your unique framework and enable the correct methods to fit within the framework of your accounting system. 

They would be able to track costing methods in line with relevant accounting standards and in most cases allow for deeper value analysis, which would assist with fair value reporting if this is relevant for the business. 

Ready, Set, Go! 🏃

Well done! You are all set to set up your company’s crypto chart of accounts and hit the ground running and master the financial reporting.