Chart of Accounts

What is the Chart of Accounts (COA)?

A chart of accounts (COA) lists all the general ledger accounts that an organization uses to organize its financial transactions systematically. Every account in the chart holds a number to facilitate its identification in the ledger while reading the financial statements.

COA helps companies prepare, maintain, and monitor their financial accounts as per the standard accounting norms. It facilitates stakeholders to interpret a company’s financial performance with ease.

Key Takeaways

How Does Chart of Accounts Work?

Chart of Accounts gives a consolidated view of the financial transactions affecting a company’s balance sheet and income statement. Depending on the size of an organization, a firm can have multiple entries for expenses and income in an accounting year.

For instance, a large-scale company could have several entries for expenses that it doesn’t separately mention in the income statement. A chart of accounts can help the company list all the costs recorded in its general ledger in one place. This will enable the directors and shareholders to quickly identify the source of expenses and revenues when going through the financial statements.

The COA will include balance sheet entries of assets, liabilities and owner’s equity, and income statement’s expenses and revenue. The chart of accounts numbering will indicate the location of the listed account in the ledger.

Components of a COA

In accounting, a chart of accounts usually has four columns:

Account Number

The account number is the unique code allotted to each account. It depicts the numbering of the COA. For example, the account number 120 represents that this account belongs to the asset class. A person can look up additional details related to the account in the ledger using this number.

Account Type

The account type depicts the nature of each account. There are five primary types of accounts, i.e., asset, liability, equity, income and expense. However, it can be reduced to four in small organizations, while in large corporations, it can also be more than five.

Assets: It comprises fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more, intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more, inventory and current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more like cash, trade receivablesTrade ReceivablesTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more, etc. All the asset accounts contain account number starting with 1.

Liabilities: The COA liability category involves long-term and short-term borrowings, trade payable, interest payable, and other current liabilities. All the liability accounts contain the account number starting with 2.

Equity: It includes equity share capitalEquity Share CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more, preference share capital, and reserve & surplus. All the owner’s equity entries contain the account number starting with 3. Assets, liabilities and equity are related to the balance sheet.

Revenue: It involves sales revenue, interest received, income from scrap, or any other earnings. All the revenue accountsRevenue AccountsRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples.read more contain account number starting with 4.

Expenses: The COA expense category comprises the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more, rent, electricity, salary and wages, and any other business expense. All the expense accounts contain number starting with 5. Expenses and revenues are related to the income statement.

Account Description

It represents the name of the account. The account description should be kept precise but capable of including multiple relevant accounts under a large account. For example, “cash receivables” will be mentioned under the type of asset.

Financial Statement

Under this column, we mention the financial statement impacted by the accounts. The asset-liability and equity accounts affect the balance sheet, whereas the income and expense accounts reflect changes in the income statement.

How to make a COA?

Initially, a company needs to decide the structure of its COA, the account types and the numbering pattern. It can derive the name of accounts from its general ledger. If the firm wants to include all the expenses to provide a complete understanding of where it is spending the finances, it can customize its COA. However, the chart should be in line with the standard accounting norms.

A small business entity can have an account number of just three digits like “118”, where the first digit signifies the account type . Since 1 is the code for assets, 118 belongs to the asset class. The other two digits, “18”, show what the asset is.

A large organization can have an account number of many digits. For instance, “5030”; where “5” is the code for expense, and “030” corresponds to the sales department’s employees commutation cost.

Chart of Accounts Example

PQR Enterprises is a firm engaged in the manufacturing of plastic containers. Given below is the company’s categorization of accounts under the COA.

Below is a sample chart of accounts list for the above company

Account NumberAccount DescriptionAccount TypeFinancial Statement
1001CashAssetBalance Sheet
1005Accounts ReceivableAssetBalance Sheet
1009InventoryAssetBalance Sheet
1014Plant & MachineryAssetBalance Sheet
1011Land & BuildingAssetBalance Sheet
2001Short-Term BorrowingsLiabilityBalance Sheet
2005Outstanding FeeLiabilityBalance Sheet
2009Accounts PayableLiabilityBalance Sheet
2013Interest PayableLiabilityBalance Sheet
2014Payroll PayableLiabilityBalance Sheet
3003Equity Share CapitalEquityBalance Sheet
3009General ReserveEquityBalance Sheet
3010Retained EarningsEquityBalance Sheet
4001Sales RevenueIncomeIncome Statement
4005Sales Return and AllowancesIncomeIncome Statement
4008Interest ReceivedIncomeIncome Statement
5004Raw MaterialExpenseIncome Statement
5009Salary and WagesExpenseIncome Statement
5013Office RentExpenseIncome Statement
5015Electricity ExpenseExpenseIncome Statement
5020Miscellaneous Expense ExpenseIncome Statement

Importance of Chart of Accounts

We can say that a COA has the same role in a company’s financial analysis as a map has in reaching the destination. It, therefore, makes it easy for the user to locate a particular account with the help of its account number.

The COA is customizable; hence, it serves the need of every business organization. A COA is a financial tool that provides an extensive understanding of cost and income to anyone who goes through the company’s financial health.

For example, the Cambodian government had decided to use a unified chart of accounts (COA) to monitor how the money was being spent on welfare initiatives. The unified COA will throw light on each source of expense and earning. Such data will prove helpful to policymakers in cutting down unnecessary costs.

COA Best Practices

A company can undertake the following suggestions mentioned below to create and maintain an effective COA:

FAQs

What is a chart of accounts?

A chart of accounts is a tool that lists all the accounts in the general ledger with unique numbering to help locate them in the relevant accounting book. Stakeholders can refer to the COA and balance sheet, and income statement to find the source of expense and earnings.

What is a chart of accounts examples?

Below is an excerpt of a chat of accounts example

Account NumberAccount DescriptionAccount TypeFinancial Statement
1001CashAssetBalance Sheet
2001Accounts PayablesLiabilityBalance Sheet
3001Owner’s equityEquityBalance Sheet
4009Interest ReceivedIncomeIncome Statement
5004Raw MaterialExpenseIncome Statement
What are the types of chart of accounts in SAP?

In SAP, the categories of a COA are as follows:
1. Operating COA: It comprises accounts used to record regular business transactions, i.e., expenses and revenue accounts.
2. Group COA: It consists of standard accounts applicable at the corporate level by all the business units.
3. Country-Specific COA: Useful for MNCs, this COA is used to maintain accounts as per the legal requirements of a particular country.

This article 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 –

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