What is a Chart of Accounts? Types, Definition, Examples

The GL contains the financial
records of the organization, including the
COA, and maintains the debit/credit balance
information. Your accounting software should come with a standard COA, but it’s up to you and your bookkeeper or accountant to keep it organized. Here are tips for how to do this, plus details about what a COA is, examples of a COA and more. Good month-end financial reports are made accurate with large non-cash journal entries. For example, if wages earned from October are paid on November 7, a journal entry must be posted to move that November 7 cash expense to October 31, to make October financials accurate.

• Revenue is the amount of money your business brings in by selling its products or services to clients.
• Your COA is a useful document that lets you present all the financial information about your business in one place, giving you a clear picture of your company’s financial health.
• Accounts may be added to the chart of accounts as needed; they would not generally be removed, especially if any transaction had been posted to the account or if there is a non-zero balance.

Expense accounts are all of the money and resources you spend in the process of generating revenues, i.e. utilities, wages and rent. Revenue accounts keep track of any income your business brings in from the sale of goods, services or rent. Every time you record a business transaction—a new bank loan, an invoice from one of your clients, a laptop for the office—you have to record it in the right account. Of crucial importance is that COAs are kept the same from year to year. Doing so ensures that accurate comparisons of the company’s finances can be made over time. To make it easy for readers to locate specific accounts or to know what they’re looking at instantly, each COA typically contains identification codes, names, and brief descriptions for accounts.

What is the standard chart of accounts?

This process is known as mapping the acquiree’s information into the parent’s chart of accounts. Companies should also ensure that the COA format remains the same over a period of time. Changes to a COA in the short term can make it challenging to analyze the difference in a company’s financial health over the long term. This way you can compare the performance of different accounts over time, providing valuable insight into how you are managing your business’s finances. A gap between account numbers allows for adding accounts in the future.

This would include your accounts payable, any taxes you owe the government, or loans you have to repay. ‍Create unique account numbers and names for each account in your chart of accounts. Ensure that each account number and name is descriptive and easy to understand. Accounts payable is an account within total absorption costing the general ledger representing a company’s obligation to pay off a short-term debt to its creditors or suppliers. While every COA will differ, there are some basic categories that most organizations will want to include, or at least consider, tailored to the specific nature of your business.

The chart of accounts is a very useful tool for the access it provides to detailed financial information for individuals within companies and others, including investors and shareholders. It is a very important financial tool that organizes a lot of financial transactions in a way that is easy to access. Because transactions are displayed as line items, they can quickly be found and assessed. This is crucial for providing investors and other stakeholders a bird’s-eye view of a company’s financial data. Liability accounts provide a list of categories for all the debts that the business owes its creditors. Typically, liability accounts will include the word “payable” in their name and may include accounts payable, invoices payable, salaries payable, interest payable, etc.

• There’s often an option to view all the transactions within a particular account, too.
• ‍Decide on the account categories you want to include in your chart of accounts.
• Companies use a COA to organize their finances and give interested parties, such as investors and shareholders, a clear view and understanding of their financial health.

The basic equation for determining equity is a company’s assets minus its liabilities. An organization’s financial statements are those
records that convey all its related business transactions,
wellbeing and status, and the overall financial
performance of the entity. There is a generally accepted numbering structure for the accounts, so everyone’s accounts appear in roughly the same order and with similar numbering. Account numbers can be appended with three- or four-digit indicators to include added data to signify divisions, parts, products, etc.

Yet, many organizations ignore this foundational concept and limp along with unmet expectations. Chart of accounts functionality is probably the most important attribute of accounting software and financial reporting. Entry level software with robust COA functionality can be made to work for many years. If the amount of the journal entry is mixed in with the regular wage expense accounts, it can be difficult to see how much of the wage expense relates to cash payments and how much is accrued.

Within the COA, accounts will be typically listed in order of their appearance in the financial statements. Typically, balance sheet accounts, including current assets and current liabilities, are listed first. The chart of accounts is a tool that lists all the financial accounts included in the financial statements of a company. It provides a way to categorize all of the financial transactions that a company conducted during a specific accounting period.

They need to be mindful of the Generally Accepted Accounting Principles and the Financial Accounting Standards Board, however. Many organizations structure their COAs so that expense information is separately compiled by department. Thus, the sales department, engineering department, and accounting department all have the same set of expense accounts. Examples of expense accounts include the cost of goods sold (COGS), depreciation expense, utility expense, and wages expense. Most new owners start with one or two broad categories, like “sales” and “services.” While some types of income are easy and cheap to generate, others require considerable effort, time, and expense. It may make sense to create separate line items in your chart of accounts for different types of income.

Example Chart of Accounts

She would then make an adjusting entry to move all of the plaster expenses she already had recorded in the “Lab Supplies” expenses account into the new “Plaster” expenses account. Instead of recording it in the “Lab Supplies” expenses account, Doris might decide to create a new account for the plaster. The chart of accounts is designed to be a map of your business and its various financial parts. Back when we did everything on paper, you used to have to pick and organize these numbers yourself. But because most accounting software these days will generate these for you automatically, you don’t have to worry about selecting reference numbers.

As businesses grow, managing financial transactions can become increasingly complex. A chart of accounts (COA) is a fundamental tool that simplifies the process by helping to organize transactions and track financial performance. In the comprehensive guide, we’ll discuss the definition, importance, and examples of a chart of accounts. Additionally, we’ll provide a free template to create your own chart of accounts. Within the categories of operating revenues and operating expenses, for instance, accounts might be further organized by business function or by company divisions.

What is the chart of accounts?

While these examples are not exhaustive and may vary depending on the specific needs and nature of the business, they can provide a useful starting point for building a chart of accounts. Usually the final line (aka the “bottom line”) of any income statement, Net Income is comprised by subtracting all business expenses and operating costs from total revenue. It is most often used to assess enterprise health and is a determinator of business loan eligibility.

The income statement accounts

While with most business processes, here one size does
not fit all, and the COA will and should evolve, enabling a greater and more customized
view into the true revenue and expense realities of your organization. It also provides
external parties with a snapshot view of an organization’s fiscal health for prudent
investment, purchase, or approval of credit. A COA is designed to provide a view of an organization’s financial situation and health, using a delineated means to separate assets, liabilities, revenue, and expenditures. It assists with management reporting and is critical for meeting the demands of regulatory compliance. It is also crucial for business decision making and course correction, especially when structured to accurately portray differentials such as product sales vs. product returns, or salaries vs. overall productivity. The goal, again, is an accurate representation of overall financial health.

Expense accounts

As each hour of labor cost is posted to the system, the estimated indirect cost of $10 per hour is also automatically posted. If the workers work 300 hours, $3,000 (300 x $10 per hour) of indirect expense will post to the project module and the financial statements. It is hard for me to be critical because 90% of business owners can probably relate to never having looked at their chart of accounts. Even many controllers and CFOs are weak on implementing chart of accounts best practices and structure one that easily and plainly produces the financial information management wants to see.

The four main account types in a chart of accounts list

It should let you make better decisions, give you an accurate snapshot of your company’s financial health, and make it easier to follow financial reporting standards. You’ll notice that each account in the chart of accounts for Doris Orthodontics also has a five-digit reference number preceding it. The first digit in the account number refers to which of the five major account categories an individual account belongs to—“1” for asset accounts, “2” for liability accounts, “3” for equity accounts, etc.