Full-Form COA (Chart of Account)
The full form of COA stands for Chart of Account. It is a list of accounts that a company generates to maintain all accounts that have been used for transaction purposes in its accounting system with the purpose of organizing, recording and segregating. This contains various accounts like revenue, expenditure, assets, liabilities, profits, etc. This can range from a simple list in a retail store consisting of 10 to 15 accounts to a very complex coverage in a large business which maintains hundreds of thousands of accounts.
How does it Work?
- This is created in alignment with the business needs. On the one hand, it can contain complex intersections of rows and columnsRows And ColumnsA cell is the intersection of rows and columns. Rows and columns make the software that is called excel. The area of excel worksheet is divided into rows and columns and at any point in time, if we want to refer a particular location of this area, we need to refer a cell., and on the other hand, it can have a straightforward set of accounts. In any case, it should be robust, definitive, and purposeful.
- A complex 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. may have more features such as allotment of accounting numbers, priority, and detailed information. However, in general, they make use of a general ledgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance. for their compilation.
- A chart of account sample contains at least three sections: Account name, type of account, and description.
- The specificity of business units numbers these, departments, accounts in that order. In the table below, taking account number 103001, the first two digits may signify the department while the rest four denotes the account category. Observe the specificity used as a certain number of system code.
Company XYZ uses the following sample of COA:
|Account Name||Account Number||Description|
|Plant Property & Equipment||102001||$100|
Suppose a company buys $1 million worth of land for its manufacturing business. The accounts department is obliged to make journal entries to keep records and maintain financial guidelines for the company. The following will be the entry in books of accounts:
|Account Name||Account Number||Description|
|1001||Cash and Equivalents||Current Asset, Balance Sheet|
|1002||Accounts Receivables||Current Asset, Balance Sheet|
|1003||Inventory||Current Asset, Balance Sheet|
|2001||Long-Term Securities||Non-Current Asset, Balance Sheet|
|2002||Goodwill||Non-Current Asset, Balance Sheet|
|2003||Plant Property & Equipment||Non-Current Asset, Balance Sheet|
|3001||Accounts Payable||Current Liabilities, Balance Sheet|
On the date, dd/mm/yyyy, account number 2003, Plant property and equipmentPlant Property And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. account, debited with $1 million while account number 1001 credited with $1 million. Notice that the two accounts’ information can be fetched from the Chart of Accounts laid below.
- Operating: This tracks accounts that are operative in nature, i.e., regular transaction accounts.
- Business: Which uses all accounts relevant to the business or corporate function.
- Country-Specific: It is those who operate based on different accounting standards or legal standards of countries.
- This is as important as any other element in a business. It serves the purpose of mapping any accounts related to the business. It also helps businesses make better decisions and follow accounting and reporting standards.
- Assume a big supermarket that has hundreds of SKUs on sale and thousands of products on its shelves. The supermarket owner’s efficient management is a function of how well he knows his products’ demand and supply profile.
- For this, he maintains an Excel file that has definite segregation of the SKUs and products. Whenever any product is sold, an Excel entry is made to reorder it. Likewise, a business maintains all its accounts of financial nature with a chart of accounts to make bookkeepingBookkeepingBookkeeping is the day to day recording of financial transactions such as purchases, sales, receipts, and payments, and it is the first step in the accounting process. It can be prepared in two ways: single-entry and double-entry; however, the double-entry approach is more widely used and recognized in most countries. efficient.
Difference Between COA and Ledger
- A LedgerLedgerLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. or General LedgerGeneral LedgerA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance. is the actual book of accounts used for making accounting entriesAccounting EntriesAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. , whereas a Chart of Accounts is simply a listing of all accounts related to the business of a company.
- A Ledger is made by summarizing all available journals and then further accounting books like a trial balance. On the other hand, it is an independent record, although used for further correspondence and recordkeeping.
- Furthermore, a Chart of Accounts can be used by multiple companies for their record while Ledger is specific to a company because of its inherent nature of keeping transactional entries of a business.
- A good COA is always well-prepared in its initial stages and serves the purpose by further improvisations until it addresses business needs.
- It reduces the effort and time to consolidate information on management requests in the future.
- It can also be used in benchmarking of business units and reduces procedures related to reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction..
- These are simple in nature and serve no complex requirements of the management.
- It has limited checks and balances, as any error in making a chart of account will not be determinable by linkages or checks.
- Even with the limited purpose that COAs serve, companies must follow guidelines set out by the US GAAP (Generally Accepted Accounting PrinciplesGenerally Accepted Accounting PrinciplesGenerally 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.) and FASB (Financial Accounting Standards Board).
- It may not be beneficial for small organizations or sole proprietorships because of the disproportionate costs and labor involved in its maintenance.
- This is very helpful for a business in systematic segregation of all its accounts. It helps company management and all stakeholders, most specifically supply chain partners, business analysts, and investors.
- This is modifiable as per business requirements, and however, it requires expertise and efforts to keep consistent records in a chart of account as any discrepancy can give the wrong picture of business health. In the modern world of high-tech business management software and systems are taken careers, businesses still owe a great deal of attention and care toward handling the most basic elements like the chart of account.