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 one hand, it can contain complex intersections of rows and columns and on the other hand, it can have a very simple set of accounts. In any case, it should be robust, definitive and purposeful.
- A complex Chart of Accounts may have more features such as allotment of accounting numbers, priority and detailed information. However, in general, they make use of general ledger for their compilation.
- A chart of account sample contains at least three sections: Account name, type of account and description.
- These are numbered by the specificity of business units, 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:
Suppose a company buys $1 million worth of land for its manufacturing business. The accounts department is obliged to make journal entries of this transaction in order to keep records and maintain financial guidelines for the company. The following will be the entry in books of accounts:
On the date, dd/mm/yyyy, account number 2003, Plant property and equipment account, debited with $1 million while account number 1001 credited with $1 million. Notice that the information pertaining to the two accounts can be fetched from the Chart of Accounts laid below.
- Operating: Which 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 which 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 and all 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 efficient management of the supermarket owner 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 the help of chart of account to make bookkeeping efficient.
Difference Between COA and Ledger
- A Ledger or General Ledger is the actual book of accounts used for making accounting entries 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 is then followed by further accounting books like a trial balance. On the other hand, 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 reconciliation to some extent.
- These are simple in nature and serve no complex requirements of the management.
- It has limited checks and balances as any error in making 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 Principles) and FASB (Financial Accounting Standards Board).
- It may not be very useful 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 not only company management but 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, these are taken care of by software and systems, businesses still owe a great deal of attention and care toward handling the most basic elements like the chart of account.