A Chart of Accounts lists all the accounts in the general ledger. The purpose is to organize the accounts and group similar ones together. Every account in the general ledger chart of accounts is assigned a specific code, and this is what we call a chart of accounts numbering. This helps the account managers to locate accounts while making entries and preparing financial statements easily.
The chart of accounts is very crucial for a company’s accounting system. You can see it as a cabinet system, where each cabinet has a different set of files. Each set of files contains a different set of accounting information. To differentiate the cabinet or to easily identify which cabinet contain which file, the companies use the chart of account numbering.
CoA Numbering Approach
It is usually a two-digit code that defines the specific company division within an organization. A company with a single division does not require division coding. This code is usually a two-digit number but can be three digits depending on the number of divisions a firm has.
Like the division code, the department code is usually a two-digit code. It defines various departments within a division. A division will usually have various departments such as accounting, production, engineering, and so on. In order to identify the departments in a division, an account manager can use two to three-digit codes.
Most organizations keep this as a three-digit code and assign these to the accounts such as assets, supplies expense, revenue, and so on.
For instance, a multi-division company would have the chart accounts numbering in the following manner – ZZ-AA-123—the ZZ representing division, AA for the department, and 123 for accounts. If the company is a single division with multiple departments, the number pattern could be something like AA-123. Finally, a small business with no departments at all could have only a three-digit code assigned to its accounts, such as 123.
What Should be the Code?
The code depends on the complexity of the business and the details that the accounting manager wants from the financial reporting system. These codes are usually numeric but could be alphanumeric as well. There is no strict rule on the code pattern, but usually, the numeric codes work best because of the simplicity of feeding it into the normal keyboard.
After setting the coding pattern, the companies move on to assigning the numbers to the division, department, and accounts.
Accounts and Their Numbers
In the chart of accounts, companies usually list accounts in the order they appear in the financial statements. The first is the balance sheet accounts, followed by the income statement. Many companies, however, structure the chart of accounts in a way that all departments have the same set of expense accounts. Following are the usual accounts that get the numbering;
Assets usually fall into two categories – current assets and fixed assets. One can easily convert current assets into cash, such as checking accounts, savings account, money market, accounts receivables, inventory, and so on. Current assets normally get the codes from 1000 to 1499, but again there are no hard rules for the same. Fixed assets, on the other hand, get codes from 1500 to 1999.
Any funds that the company owns to the outside parties are liabilities. There are various types of liabilities, such as current liabilities, non-current liabilities, and more. For instance, every organization has a payroll liability that tracks the taxes deducted from employees’ paychecks and holds until it is paid to the Government. Such liabilities include local taxes, federal and state income, and the employee-paid portion of taxes such as Social Security and Medicare
It is the revenue that the company generates from day-to-day operations, such as professional fees, products sold, and reimbursable expenses, and so on.
Cost of Goods Sold (COGS)
It includes the cost of raw material, freight charges for transporting the raw material to the warehouse, freight charges by sending the goods to the customer, and so on.
Expenses or Overhead cost
Overhead costs or fixed costs are the expenses that the company needs to pay even if it is not producing anything, for example, telephone, insurance, utilities, and so on.
Apart from these, other types of accounts include Other Expenses, Other Income, and so on.
Example of Chart of Accounts Numbering
Following is an example of a typical Chart of Accounts. The example also includes the usual number ranges of each head.
Balance Sheet Accounts
Assets (1000 – 1999)
Liabilities (2000 – 2999)
Owner’s Equity (3000 -3999)
Income Statement Accounts
Operating Revenues (4000 – 4999)
Operating Expense (5000 – 5999)
Overhead Costs or Expenses (6000 – 6999)
Non-operating revenue and gains (7000 – 7999)
Non-operating expenses and Losses (8000 – 8999)