Chart of Accounts – Meaning, Importance And More

A Chart of Accounts or CoA is the record of all accounts of a company pooled in one place. A company usually makes hundreds of transactions daily. So, how the accounts manager knows in which account they will have to record it. This is where CoA becomes useful.

CoA includes all the accounts that the company has made available for recording transactions in its general ledger. A basic Chart of Accounts includes records of Expenses, Revenue, Liabilities, Equity, and Assets. Usually, CoA consists of the name of the account, a brief description, and an identification code.

The chart of accounts might vary depending on the industry the company is operating. Such a chart not only helps a company put all the data together but also gives a quick view of the spending and income. Chart of Accounts also serves as a source of information for an outsider who wants to know about the company and the nature of its business. The document gives a basic idea about the company, its business, and its day-to-day operations.

Chart of Accounts – Significance

  • Serves as the foundation for the company’s record-keeping system. Makes the addition of new accounts and deletion of old accounts easy.
  • Chart of Accounts does away with the need to remember every single account that the company maintains. In the case of finance, CoA works as the map of the entire financial system that the company is following.
  • It also clarifies the accounting practices that a company follows and the records it maintains.
  • CoA gives a clear demarcation between different accounts. Also, it makes it easy to identify every transaction that is being recorded in the accounts.
  • Also, it makes it easier to follow financial reporting standards.
  • The whole idea of the Chart of Accounts is to help an onlooker make better decisions by presenting a summary of the company’s financial health.
Chart of Accounts

Setting up a Chart of Accounts

A new business should always start by setting up the CoA that the business will use. The accounts that come in the CoA depict the nature of the business.  Take, for instance, a business operating in the car segment will have more car-related accounts along with general accounts that are common to other businesses.

Account managers make sure that different accounts are listed on the CoA in such a way that they appear logical. Usually, the balance sheet accounts are listed first, followed by income statement accounts.

When an accounts manager user lists the accounts in the CoA, there should be a numbering system to ensure easy identification. Numbering is important as it helps in easily recording a transaction. While bigger businesses usually stick with four-digit numbers, small businesses use three-digit numbers. A company may leave additional space at the end for future transactions.

Further, each category gets a range of numbers. For instance, expenses get the numbers between 111-999 or assets from 1001-1999. The management would always want the numbering to be consistent so as easily compare the performance between different years.

How big a CoA is, depends solely on the company’s size. If a company is an international corporation with multiple divisions, then it would have thousands of accounts. And, if a company is small, say a retailer dealing in one product, then it will have lesser accounts.

Adjusting CoA

A simple rule for making edits to a CoA is – to add new accounts anytime during the year. But, to delete an account or accounts, one must wait until the end of the year. Deleting an account in the middle could mess up the account books.

CoAs are easily customizable to reflect the company’s operations. However, a company must prepare them according to the Generally Accepted Accounting Principles (GAAP) and Financial Accounting Standards Board (FASB) guidelines.

Categories of CoA

Every account in the CoA either relates to the balance sheet or the income statement. Let’s check the type of accounts under each category:

Balance Sheet Accounts

It is a group of accounts comprising of Asset accounts, Owner’s equity, and Liability accounts.

Asset Accounts

As clear by the name, such accounts include all the assets that a company owns. Assets can be tangible or intangible, current assets and fixed assets. Numbering for such charts of accounts follows a traditional balance sheet format, starting with the current assets and then fixed assets. Some of the sub-accounts under the assets accounts can be cash, savings account, prepaid insurance, inventory assets, petty cash balance, etc.

Liability Accounts

Such accounts include the debts that a company owes to the creditors or future debts. Usually, liability accounts have the word payable at the end, such as salaries payable, invoices payable, accounts payable, etc.

Similar to the assets accounts, liability accounts follow a traditional balance sheet format where current liabilities come first and then the long-term liabilities. It is up to the company to sequence the items for comparison in different accounting periods. Some of the sub-accounts under liability accounts are accounts payable, notes payable, accrued liabilities, etc.

Owner’s Equity Accounts

Show the value of the business after subtracting the liabilities from the assets. Owner’s equity is a measure of the value of a company to the shareholders. Some of the items that go into the owner’s equity include common stock, retained profits, and preferred stocks. It again depends on the company to allow a number to such accounts.

Income Statement Accounts

Accounts that come in the income statement accounts comprise of Revenue Accounts and Expense accounts.

Revenue Accounts

Detail the income a business makes from selling its core products and services. Various types of revenue accounts could be sales returns accounts, sales discounts accounts, interest income accounts, etc. Numbering depends on the business, but it normally starts from 4000.

Expense Accounts

Include all the money that the company spends to generate the revenue for the business. These expenses relate to manufacturing a product or supporting other revenue-generating business activities. To simplify the expenses accounts, one can base it on Schedule C, which would also help the companies to file taxes as well.

Read Charts of Accounts Example for more clarification.

Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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