Chart of Accounts

 

What is a Chart of Accounts?
A Chart of Accounts (COA) is essentially a comprehensive list of all the financial accounts maintained within an entity’s general ledger, which serves as the central repository for recording all business transactions during a specific accounting period.

Essentially, the chart of accounts acts as a financial roadmap for the entity, offering a structured filing system where all transactions are consolidated and categorised under relevant headings. Usually, these categories include assets, liabilities, equity, income, and expenses, offering a comprehensive overview of the entity’s financial status.

Each account in the chart is designated with a unique alphanumeric code, facilitating subsequent reporting and analysis. This structured organisation allows for the efficient generation of precise and timely financial reports crucial for owners and investors in making informed decisions about the entity’s operations.

The fundamental role of a chart of accounts lies in facilitating double entry accounting, a systematic approach to record keeping where each business transaction is documented twice. This entails noting the source of money and its destination.

A standard chart of accounts includes various account types, with multiple accounts listed under each category. For instance, under asset accounts, an entity may have separate accounts for cash on hand, accounts receivable, and real estate holdings. These categories aid in organising financial data effectively.

Balance Sheet Accounts

Balance sheet accounts, including assets, liabilities, and equity, are featured on an entity’s balance sheet, which depicts the entity’s financial position at a specific moment. Here’s an overview of what typically falls under each category:

Asset Accounts: These include cash, securities, accounts receivable (AR), and inventory.
Liability Accounts: These consist of accounts payable, taxes payable, wages payable, and accrued liabilities.
Equity Accounts: Examples include common stock, retained stock, dividends, retained earnings, and owner capital.

Income Statement Accounts

Income statement accounts capture both expenses and revenues. The income statement, also known as the profit and loss statement, illustrates a entity’s performance during a reporting period, highlighting gains or losses incurred.

Expense Accounts: These cover various categories such as the cost of goods sold, operating expenses, non operating expenses, credit card expenses, and prepaid expenses.
Revenue Accounts: These include sales revenue, dividend revenue, gains on asset sales, as well as other revenue sources like rent or royalty income claimed by the entity.

How is a Chart of Accounts Organised?

Each account in the entity’s chart of accounts consists of three key elements:

• Identification code
• Description
• Name

These components aid in locating specific accounts and transactions, particularly as the entity’s ledger becomes more intricate over time.

Regarding chart of accounts numbering:

The numbering system employed for accounts maintains financial organisation and facilitating transaction retrieval within each subcategory.

A prevalent method involves a parent child structure using a four digit numbering system. This system allows for further breakdown into smaller, similarly numbered subcategories.

For instance, the entity may adopt a numbering scheme as follows:

• 0100 for current assets accounts, such as cash and accounts receivable
• 0200 for liabilities, encompassing accounts payable and accrued expenses
• 0300 for owners’ equity accounts, including common stock and investments

Similar accounts can then be nested under broader categories within these numerical ranges.

It’s important to note that as more accounts are added, there’s a risk of exhausting numbers within each parent category. Consequently, inserting new numbers into existing sequences may become challenging.

 

Chart of Accounts – Best Practices