Chart of Accounts (COA) Definition
Chart of Accounts (COA) is a list of all the accounts that an organization requires to record its day to day operational expenses and these accounts are used for the preparation of financial statements after aggregating the information recording into these accounts. For easy identification of accounts generally, these accounts are assigned with specific no. and name in software used by the company. The company can modify its software as per their business requirements.
List of Categories on the Charts of Account
Each account of charts of accounts is mainly linked with two statements one is a Balance sheet and the second is profit & loss account.
#1 – Linked with the Balance Sheet
Below are the classes of Account which are linked with the Balance sheet:
- Assets: These Includes fixed Assets, Intangible Assets, Inventory and Current assets like cash, Trade receivables
- Liabilities: These Includes Long term and short term Borrowings, Trade payable, Interest Payable and other current liabilities.
- Equity: This Includes equity share capital, preference share capital and Reserve & Surplus.
#2 – Linked with the Profit & Loss Statement
Below are the classes of an account which are linked with profit & loss statement:
- Income: This includes all the Income like Income from the sale of finished goods, Interest income, income from the sale of scrap or any other income.
- Expenses: This includes the cost of goods sold, rent, electricity, salary & wages and any other expenses which are related to the business.
Example of Charts of Account
ABLC Inc has divided his chart of accounts (COA) into five parts and each part has a unique identification number.
- Assets – Assets class is assigned with identification no. which start from 10000 and ends with 19999.
- Liability – Liabilities class is assigned with identification no. which starts from 20000 and ends with 29999.
- Equity – Equity class is assigned with identification no. which starts from 30000 and ends with 39999.
- Income – Income class is assigned with identification no. which starts from 40000 and ends with 49999.
- Expenses – Income class is assigned with identification no. which start from 50000 and ends with 59999.
Journal Entry:
- ABLC Inc has Purchased Plant & Machinery of $ 1000 as on 01.01.2019
In the above journal entry, one asset has increased and another asset has decreased these numbers are directly linked with the balance sheet and the impact of entry will automatically be posted in the balance sheet at the same time.
- ABLC Inc has paid an office rent of $ 500 as on 30.06.2019.
In the above journal entry expenses have increased and cash has decreased. Expense account linked with profit & loss account and cash account linked with a balance sheet, therefore, the impact of the above entry will be reflected in both profit & loss account and balance sheet.
(Note – Above Account number has been taken on the basis of the below example of accounts chart.)
Advantages
- Chart of Accounts (COA) methods gives clear insight and financial health of the company.
- The company can modify this according to their business requirements.
- The company can restrict the access of information between an employee of the company according to their department and work.
- Chart of accounts helps in the preparation of financial statements at any point in time.
- Because of identification and separate accounts of all the operational costs, it is easy to analysis and controls the cost.
Disadvantage
- Chart of accounts requires skills and expertise to record each and every transaction in correct account otherwise it will give the wrong picture.
- It is very important that each branch of the company will use the same list of accounts and the same method for recording the transactions then only it will give a correct picture in a consolidated account statement.
- It is very expensive because it requires more manpower for the recording of operational transactions in each account separately.
- This method totally depends on the accounting software, therefore, there is a risk of information leak if software or password can be hacked.
- It is not useful for small organizations.
Conclusion
Chart of account is very important for any organization because it is systemically designed to segregate all the Assets, Liability, and Income & Expenditure of the organizations which makes easier for management, investors and other stakeholders to understand and analyze the financial status of the organization that helps them to make the decision.
Chart of account also helps to record any transaction in books of account because each account and their characteristics are clearly mentioned in the chart. At the same time, it is very important that the chart of account has been prepared according to the business requirement and accounts are correctly linked with ledgers and financial statements otherwise it will give the incorrect result.
Charts of account are not useful/profitable for a small organization or proprietors firm because it involves the cost of accounting software and skilled manpower.
Recommended Articles
This has been a guide to what is a Chart of Accounts (COA) and its definition. Here we discuss the list of categories of accounts chart based on balance sheet & PL Statement with the help of examples. You can learn more from the following articles –
