What is a Chart of Accounts?

A Chart of Accounts is an organized list of the accounts used to categorize and track financial transactions in double-entry bookkeeping. It typically includes asset, liability, equity, income, and expense accounts.

How is a Chart of Accounts structured?

A Chart of Accounts is organized according to categories and account numbers, which can be customized to meet the needs of each business. Account numbers typically range from 1-99 for assets, 100-199 for liabilities, 200-299 for equity accounts, 300-399 for income accounts, and 400-499 for expense accounts.

What are the benefits of having a Chart of Accounts?

Having a Chart of Accounts allows businesses to easily track their financial transactions, generate meaningful financial reports, and maintain compliance with applicable regulations. It also ensures consistency in the way expenses are reported and simplifies bookkeeping tasks.

Does every business have to have its own Chart of Accounts?

Yes, each business should have its own Chart of Accounts that outlines the specific account categories and numbers relevant to their operations.

How often should a Chart of Accounts be updated?

The Chart of Accounts should be reviewed at least once a year to ensure it is up-to-date with any changes in business operations. Additionally, any significant changes should be reflected in the Chart of Accounts as soon as possible.

What Are Chart of Accounts? | How It Works, Setting up & Pros

Chart of Accounts (COA) Definition

A chart of accounts is a system used by an organization to organize its accounting entries.

It shows the accounts that are needed for running a business and preparing financial statements. It reflects all the financial accounts that will be used in the general ledger of a business.

A chart of accounts categorizes each account into either “assets,” “liabilities,” “equity,” “revenues,” or “expenses.”

These classifications form what is called the ‘financial statement’ which comprises the “balance sheet” and the “income statement” which is also called the “profit report.”

The chart of accounts makes it easy to identify each account, allowing for more organized reporting.

What Is the Use of a Chart of Accounts?

Using a chart of accounts will help your organization keep its financial records organized. It allows users of financial statements to come up with a clear insight into the company’s financial health.

How to Set up a Chart of Accounts

In order to set up a chart of accounts, begin by listing down the typical accounts that apply to your business. Some of these accounts would include:

The chart of accounts typically has four columns: account, category, sub-account, and account number.

Account

The account column refers to whether a category belongs to a Balance Sheet or to an Income Statement.

Sub-Account

This refers to the specific accounts to be used in making journal entries such as cash, accounts receivable, accounts payable, retained earnings, utilities expense, and revenue.

Account Number

Each account is to be assigned a unique account number to be used for coding charges.

In a computerized system of accounting, the system automatically generates the account numbers. For manual ones, a business has to set up its own numbering system.

Example of a Chart of Accounts

Below is an example of a chart of accounts:

Why Is a Chart of Accounts Important?

The importance of a chart of accounts lies in its ability to organize financial records. For an organization, it is important that all transactions are categorized correctly because they will be used as the basis for generating reports about the business.

A chart of accounts allows for more accurate reporting and prevents data entry errors. It also helps with maintaining financial privacy since only authorized personnel can view the reports and they only see the information relevant to their department.

However, it is important that a business regularly review and revise its chart of accounts because as growth occurs, some accounts become irrelevant or others need to be added.

For example, if an organization expands into different product lines, it needs to have a separate account for each line of products.

Final Thoughts

A chart of accounts is a list used for organizing financial statements, transactions, and codes of a business. It categorizes them so they are easy to find and use when generating reports.

In order to have a useful chart of accounts, it needs to be regularly reviewed and revised so that it is relevant to the current state of the business.

Also, it needs to be set up properly according to one’s preferred chart of accounts structure.

If manually done, an organization should come up with its own numbering system for each account’s corresponding account number.

Otherwise, a more established numbering system can be adopted if handled by a computer.

With these, financial statements and reports become easier to generate, thus helping businesses make better decisions for their growth.

Chart of Accounts FAQs