What Is a Chart of Accounts?
Let me explain what a chart of accounts really is. It's essentially an index of all the financial accounts in your company's general ledger. Think of it as an organizational tool that lists out, by category and line item, every financial transaction your company handles during a specific accounting period.
Key Takeaways
You use a chart of accounts to organize your finances and provide interested parties, like investors and shareholders, with a clearer understanding of your company's financial health. To make finding specific accounts quick, each one in the COA usually has an identification code, a name, and a brief description. You can modify your COA to suit your company's size and type of business. Remember, it's crucial to keep the same format over time so you can accurately compare periods.
How a Chart of Accounts Works
Whether your company is large or small, you rely on a chart of accounts to organize finances and give stakeholders a clear view of financial health. By separating expenditures, revenue, assets, and liabilities, you achieve this and ensure your financial statements comply with reporting standards.
Consider this analogy to your own finances: if you have a checking account, savings account, and a certificate of deposit at the same bank, logging in online shows you an overview of balances in each. Similarly, using an app like Mint or Personal Capital to manage all your accounts gives you a view of assets and liabilities on one page— that's basically what a company's COA does.
There's no single format for a chart of accounts. They generally follow a basic structure, but the final setup depends on your business type and size.
COA Structure
You typically set up the COA to display information in the order it appears in financial statements, starting with balance sheet accounts followed by income statement accounts.
These main accounts—assets, liabilities, shareholders' equity, revenue, and expenses—can break down into sub-accounts like operating revenues, operating expenses, non-operating revenues, and non-operating losses. You might further organize operating revenues and expenses by business function or company divisions.
Example Sub-Accounts for a Small Company
- Assets: Cash, Savings account, Petty cash balance, Accounts receivable, Undeposited funds, Inventory assets, Prepaid insurance, Vehicles, Buildings
- Liabilities: Company credit card, Accrued liabilities, Accounts payable, Payroll liabilities, Notes payable
- Shareholders' equity: Common stock, Preferred stock, Retained earnings
Account Identifiers
To help you locate specific accounts easily or understand them at a glance, each COA includes identification codes, names, and brief descriptions for accounts. This coding is key because the COA can have many line items per primary account.
For instance, you might code assets from 100 to 199, liabilities from 200 to 299, equity from 300 to 399, and so on. These can break down further, like current assets (110-119) and current liabilities (210-219). The number of digits depends on your company's size and transaction complexity.
Many organizations structure their COAs to compile expense information by department, so sales, engineering, and accounting all use the same expense accounts, such as cost of goods sold, depreciation expense, utility expense, and wages expense.
Special Considerations
Your COA can differ and be tailored to your operations, but it must follow guidelines from the Financial Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP). Most importantly, keep your COA the same year after year to ensure accurate financial comparisons over time.
Why Is a Chart of Accounts Important?
It's a vital financial tool that organizes numerous transactions for easy access. Since transactions appear as line items, you can find and assess them quickly, which is essential for giving investors and stakeholders a broad view of your company's financial data.
Is There a Single COA Format?
Not exactly. You can use, create, or modify any format that fits, but the most common organizes information by individual account with a code and description. The key is using the same format consistently for reliable comparisons across periods and years.
Is a Chart of Accounts Required?
No, but companies of all kinds consider it necessary to categorize transactions for quick and easy reference.
The Bottom Line
A chart of accounts is a document that numbers and lists all financial transactions your company conducts in an accounting period, arranged in categories matching the balance sheet and income statement. It provides useful access to detailed financial information for people inside the company and outsiders like investors and shareholders.
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