A chart of accounts (COA) is an index that lists all the accounts to record all the transactions a company has made in the general ledger.
Setting up a chart of accounts is crucial as it helps businesses keep tabs on their spending, taxes, and sales.
However, creating and maintaining a chart of accounts can be challenging for accountants and bookkeepers. In this article, let’s learn about chart of accounts definition, examples, types, and how it works.
What Is a Chart of Accounts (CoA)?
A chart of accounts (COA) is a financial organizational tool that comprehensively lists every account in a company’s general ledger.
The COA itself is broken down into subcategories, enabling businesses to analyze their financial transactions and identify where the money is coming from and going to. It also provides investors and shareholders insights into the financial health of the company.
A chart of accounts consists of a name, brief description, and identification code in a multi-digit number. This way, employees in the company can easily locate specific accounts.
How Does a CoA Work?
The COA is often organized by operating revenues, operating expenses, business functions (such as production, selling, administrative, and financing), business units, product lines, or other relevant criteria.
Each transaction in the CoA in the accounting system is assigned to a specific account and sub-accounts. These accounts are generally arranged in the following sequence:
|Balance Sheet Accounts||Assets|
|Income Statement Accounts||Operating Revenues|
Operating Expenses (G&A)
In many cases, a company’s organizational chart defines the structure of its COA, reflecting the different departments and their respective financial responsibilities.
For instance, if a business has ten departments, each may be responsible for its own expenses, such as salaries and supplies, resulting in different expense accounts for each department within the COA.
How to Organize a Chart of Accounts
Organizing a Chart of Accounts involves structuring the accounts in a systematic manner to effectively capture and classify financial transactions.
Here are some general guidelines on how to organize a Chart of Accounts:
Business Account Names
Choose descriptive and meaningful names for your business accounts that clearly indicate the type of transactions and the nature of the accounts. For example, “Bank Fees,” “Cash,” and “Taxes” are examples of specific account names that provide clarity on the recorded transactions.
Assigning account numbers to each account can help with the organization and identification of accounts. Consider using a numbering system that aligns with standard accounting practices, such as using a specific range of numbers for each account category.
For example, here are the most common use cases of code numbers in classifying accounts:
- 1,000 to 1,999 for Assets
- 2,000 to 2,999 for Liabilities
- 4,000 to 4,999 for Income
- 6,000 to 7,999 for Operating Expenses
Balance sheet accounts, such as Assets, Liabilities, and Equity, should be listed first in the Chart of Accounts. These accounts provide a snapshot of the company’s financial health at a specific time and are typically more critical for financial analysis and reporting purposes.
|Account Type and Definition||Example|
Assets represent valuable resources a company possesses, contributing to its overall worth.
In the Chart of Accounts, assets are usually placed at the beginning and classified as either current assets (such as cash and accounts receivable) or long-term assets (like equipment and vehicles), depending on their anticipated cash conversion or utilization in the business.
|Accounts receivable (amounts owed to the company by customers), cash, inventory, and equipment.|
Liabilities represent the financial obligations or debts a company has towards external entities.
Liabilities are classified as either current liabilities (such as accounts payable and taxes payable) or long-term liabilities (like business loans), depending on their respective maturity or payment deadlines.
|Accounts payable (amounts owed by the company to suppliers), business loans, and taxes payable|
Equity represents the residual interest in the assets of a company after deducting its liabilities.
|Common stock and preferred stock (which represent the ownership interests of shareholders in the company) as well as retained earnings (to reflect the accumulated profits or losses of the company since its inception)|
Revenue accounts represent the income generated by a company through the sale of goods or services during regular business operations.
These accounts record the financial gains a company receives during a specific timeframe, playing a vital role in determining the organization’s gross profit and net income.
|Sales, interest revenue, and other operating revenues.|
Expenses represent the costs incurred by a company in its efforts to generate revenue.
|Payroll expenses, rent, travel expenses, and utility bills.|
Example of a Chart of Accounts
The chart of accounts is organized using a distinct numeric range that indicates the account type and its placement within the financial statements.
Here’s an example of a chart of accounts in a small business:
|Account Number||Account Type||Account Sub-Type||Account Name|
|1.2||Assets||Current Assets||Accounts Receivable|
|2.1||Liabilities||Current Liabilities||Accounts Payable|
|2.2||Liabilities||Current Liabilities||Short-term Loans|
|2.3||Liabilities||Current Liabilities||Accrued Expenses|
|2.4||Liabilities||Long-term Liabilities||Long-term Loans|
|2.5||Liabilities||Long-term Liabilities||Deferred Tax Liabilities|
|3.1||Equity||Owner’s Equity||Owner’s Capital|
|3.2||Equity||Owner’s Equity||Retained Earnings|
|4.1||Revenues||Operating Revenues||Sales Revenue|
|4.2||Revenues||Operating Revenues||Service Revenue|
|4.3||Revenues||Non-operating Revenues||Interest Income|
|5.1||Expenses||Operating Expenses||Cost of Goods Sold|
|5.2||Expenses||Operating Expenses||Wages & Salaries|
|5.3||Expenses||Operating Expenses||Rent Expense|
|5.4||Expenses||Operating Expenses||Utilities Expense|
|5.5||Expenses||Operating Expenses||Depreciation Expense|
|5.6||Expenses||Operating Expenses||Insurance Expense|
|5.7||Expenses||Operating Expenses||Marketing & Advertising Expense|
|5.8||Expenses||Operating Expenses||Office Supplies Expense|
|5.9||Expenses||Operating Expenses||Travel & Entertainment Expense|
Best Practices for Managing a Chart of Accounts
Here are some best practices to follow when setting up and maintaining a Chart of Accounts (COA):
- Group similar accounts under relevant categories or subcategories to make it easier to locate and analyze accounts. For example, grouping all expense accounts related to a specific function, such as “Marketing Expenses” or “Salaries and Wages Expenses,” can help in tracking and analyzing expenses for that particular function.
- Customize based on business needs. Consider your organizational structure, reporting requirements, and industry-specific needs when organizing your Chart of Accounts. Small businesses with fewer accounts may have a simplified numbering system or use industry-specific codes to organize their accounts.
- Regularly review and update your CoA to ensure it accurately reflects your company’s current financial structure. Remove any obsolete accounts and add new ones as necessary
- Align your CoA with accounting standards, such as GAAP or IFRS. This will ensure that your financial statements are accurate, reliable, and can be easily audited if needed.
- Train your accounting team and ensure that they’re familiar with the structure and organization of your COA. This will help them accurately record transactions and generate financial reports that are consistent and easy to understand.
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