What it means
A general ledger account such as "Repairs and maintenance" or "Accrued liabilities" is just a running total. Account analysis asks what is in it.
For a balance sheet account, that means listing the items that make up the closing balance, checking that each is valid and correctly valued, and identifying anything that should not be there, such as an old accrual that was never reversed or a customer deposit sitting in the wrong account. A balance that cannot be explained item by item is a balance that cannot be trusted, and auditors will ask for exactly this schedule.
Reconciling and analysing every material balance sheet account each month is a hallmark of a well-run finance function. For an expense account, account analysis often means studying how the cost behaves.
By looking at the account's monthly totals against activity levels (units produced, hours worked, deliveries made) the accountant can estimate how much of the cost is fixed and how much varies with volume. This is called the account analysis method of cost estimation, and it usually relies on the accountant's knowledge of what each line item is: the maintenance contract is fixed, the spare parts vary with machine hours, the call-out fees are semi-variable.
The result feeds directly into budgets, break-even calculations and pricing. Account analysis also underpins variance investigation.
When an account is well over budget, the analysis shows which transactions drove it: one large unusual invoice, a run of small overruns or a posting error. That distinction determines the response.
In practice
Real-world examples.
Example
At month end a bookkeeper analyses the "Accrued liabilities" account and produces a schedule listing each accrual, its date, its basis and when it is expected to reverse, then removes two accruals from the previous year that were never cleared.
Example
A financial analyst analyses the "Sales commissions" account and finds that 80% varies directly with revenue while 20% is a fixed retainer for the sales director, which changes the contribution margin used in pricing decisions.
Example
A controller analyses the "Miscellaneous expenses" account after it triples in a quarter and discovers that a new employee has been coding software subscriptions to it instead of to IT costs.
Think of it
“Account analysis is examining individual accounts to understand what's in them and whether it's correct.
Formula
Calculation
For cost estimation, each item in the account is classified and totalled:
Total cost = Fixed costs + (Variable cost per unit x Activity level)
Worked example. A delivery company's "Vehicle operating costs" account shows $48,000 for a month in which its vans drove 40,000 miles. The accountant analyses the transactions:
- Vehicle leases: $15,000 (fixed)
- Insurance: $3,000 (fixed)
- Fuel: $18,000 (variable)
- Tyres and servicing: $8,000 (variable, driven by mileage)
- Roadside assistance contract: $1,000 (fixed)
- Parking fines and tolls: $3,000 (variable)
Fixed costs = $15,000 + $3,000 + $1,000 = $19,000
Variable costs = $18,000 + $8,000 + $3,000 = $29,000
Variable cost per mile = $29,000 / 40,000 = $0.725
Cost formula: Vehicle operating costs = $19,000 + $0.725 x miles
If next month's plan is 46,000 miles, the budget is $19,000 + $0.725 x 46,000 = $52,350. Without the analysis, a manager might have applied the average cost of $1.20 per mile and budgeted $55,200, overstating the cost of growth.Case study
Seen in the real world.
A restaurant group with 18 sites budgeted kitchen labour at a flat 28% of sales, and every site that exceeded the ratio was told to cut hours. One site manager pushed back, and the finance team ran an account analysis of her kitchen payroll. The analysis split the account into a fixed core (head chef, sous chef and one prep cook, needed whether the restaurant served 50 covers or 300) and a variable element (casual staff rostered against booked covers).
The fixed core alone was 24% of her site's sales because the site was small, so there was very little variable labour left to cut. Applying the same analysis across the group showed that the flat 28% target was punishing small sites and letting large sites overspend.
The group replaced the single ratio with a fixed-plus-variable formula for each site. Total labour cost fell by 1.5 percentage points over the next year, and the small sites stopped losing experienced chefs to unrealistic targets.
Watch out
Common mistakes.
- Accepting a ledger balance because it agrees with last month. Agreeing is not the same as being right; the balance must be built up from identifiable items.
- Classifying costs by their account name rather than their behaviour. "Maintenance" can contain fixed contracts and highly variable repairs.
- Analysing accounts only at year end. Monthly analysis catches errors while they are small and recent.
Questions
People also ask.
How is account analysis different from reconciliation?
Reconciliation proves a balance agrees to an external source such as a bank statement. Account analysis explains what the balance is made of. Both are needed.
What is the account analysis method in cost accounting?
Classifying each item in an account as fixed, variable or mixed based on knowledge of the business, then building a cost formula from the totals.
Which accounts should be analysed every month?
Any balance sheet account with a material balance, and any expense account that is volatile, over budget or used in pricing.
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