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.

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 revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more 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 payableInterest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company's balance sheet.read more, 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 entityBusiness EntityA business entity is one that conducts business in accordance with the laws of the country. It can be a private company, a public company, a limited or unlimited partnership, a statutory corporation, a holding company, a subsidiary company, and so on.read more 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 Number	Account Description	Account Type	Financial Statement
1001	Cash	Asset	Balance Sheet
1005	Accounts Receivable	Asset	Balance Sheet
1009	Inventory	Asset	Balance Sheet
1014	Plant & Machinery	Asset	Balance Sheet
1011	Land & Building	Asset	Balance Sheet
2001	Short-Term Borrowings	Liability	Balance Sheet
2005	Outstanding Fee	Liability	Balance Sheet
2009	Accounts Payable	Liability	Balance Sheet
2013	Interest Payable	Liability	Balance Sheet
2014	Payroll Payable	Liability	Balance Sheet
3003	Equity Share Capital	Equity	Balance Sheet
3009	General Reserve	Equity	Balance Sheet
3010	Retained Earnings	Equity	Balance Sheet
4001	Sales Revenue	Income	Income Statement
4005	Sales Return and Allowances	Income	Income Statement
4008	Interest Received	Income	Income Statement
5004	Raw Material	Expense	Income Statement
5009	Salary and Wages	Expense	Income Statement
5013	Office Rent	Expense	Income Statement
5015	Electricity Expense	Expense	Income Statement
5020	Miscellaneous Expense	Expense	Income 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:

• Customize the COA by adopting a suitable pattern for account numbering based on your company’s size, departments, structure and operations. Remember that the best chart of accounts structure is the one that serves your managerial accounting purpose.
• Use a standard COA as per the norms set forth by the GAAPGAAPGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors.read more and tax authorities. Avoid making changes to the format; otherwise, it will cause confusion and error.
• Design your COA to suit the business needs for the upcoming years. This will result in the creation of a more consistent, comparable and helpful index.
• Keep an eye on the unnecessary accounts whose amount you can transfer to the larger accounts. This step will aid you in keeping the COA list short and accessible.
• Many large corporations use accounting softwareAccounting SoftwareWave Accounting Software, Akaunting Software, Slick Pie Accounting Software, GnuCash Accounting Software, xTuplePostBoks Accounting Software, Inv24 Accounting and Inventory Software, and NCH Express Accounts Accounting Software are among the best accounting softwares available.read more like SAP to make their COA. A chart of accounts is created as an excel spreadsheet, with many using an online template such as Quickbooks‘ for ease. Chart of AccountsChart Of AccountsChart of Accounts (COA) is a list of all the accounts in which a business records its regular operational expenses. It is used to collect information for preparing a Company’s financial statements. read more

FAQs

Account Number	Account Description	Account Type	Financial Statement
1001	Cash	Asset	Balance Sheet
2001	Accounts Payables	Liability	Balance Sheet
3001	Owner’s equity	Equity	Balance Sheet
4009	Interest Received	Income	Income Statement
5004	Raw Material	Expense	Income Statement

Recommended Articles

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