Chart of Accounts COA Definition & Set Up

what is a chart of accounts

You can think of this like a rolodex of accounts that the bookkeeper and the accounting software can use to record transactions, make reports, and prepare financial statements throughout the year. The chart of accounts is a list of every account in the general ledger of an accounting system. Unlike a trial balance that only lists accounts that are active or have balances at the end of the period, the chart lists all of the accounts in the system. It doesn’t include any other information about each account like balances, debits, and credits like a trial balance does. A standard COA will be a numbered list of the accounts that fill out a company’s general ledger, acting as a filing system that categorizes a company’s accounts. It also helps with recording transactions and organizing them by the accounts they affect to help keep the finances organized.

  1. If you have many financial accounts, you can break those down into further subcategories — such as operating revenues or non-operating losses — to keep everything organized.
  2. However, doing so could litter your company’s chart and make it confusing to navigate.
  3. A chart of accounts is a list of all your company’s “accounts,” together in one place.
  4. For example, asset accounts for larger businesses are generally numbered 1000 to 1999 (or 100 to 199), and liabilities are generally numbered 2000 to 2999 (or 200 to 299).
  5. You don’t need a separate account for every product you sell, and you don’t need a separate account for each utility.

Understanding the Chart of Accounts: A Fundamental Guide

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. A well-designed chart of accounts should separate out all the company’s most important accounts, and make it easy to figure out which transactions get recorded in which account. Liability accounts are a record of all the debts your company owes. Liability accounts usually have the word “payable” in their name—accounts payable, wages payable, invoices payable. “Unearned revenues” are another kind of liability account—usually cash payments that your company has received before services are delivered.

what is a chart of accounts

Can a chart of accounts be customized to fit specific business needs?

The account’s unique identifier (e.g., 1010.1) is used to specify where the debit or credit is to be recorded. For bigger companies, the accounts may be divided into several sub-accounts. Revenue is the amount of money your business brings in by selling its products or services to clients. Our partners cannot pay us to guarantee favorable reviews of their products or services.

Major Types Of Chart Of Accounts

After almost a decade of experience in public accounting, he created to help people learn accounting & finance, pass the CPA exam, and start their career. Expenses refer to the costs you incur while running your business. This would include your office rent, utilities, and office supplies. Current liabilities are classified as any outstanding payments that are due within the year, while non-current or long-term liabilities are payments due more than a year from the date of the report.

But the final structure and look will depend on the type of business and its size. For ease of use, a COA contains the list of accounts’ names, brief descriptions, account type, account balance and account codes for each sub-account. In addition to assisting with financial statement creation, there are other advantages to using a chart of accounts. Accounting systems, by definition, have a general ledger in which your asset accounts (what you own) match your liability accounts (what you owe). The complete Swedish BAS standard chart of about 1250 accounts is also available in English and German texts in a printed publication from the non-profit branch BAS organisation.

They represent what’s left of the business after you subtract all your company’s liabilities from its assets. They basically measure how valuable the company is to its owner or shareholders. 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.

The bookkeeper would be able to tell the difference by the account number. An asset would have the prefix of 1 and an expense would have a prefix of 5. This structure can avoid confusion in the bookkeeper process and ensure the proper account is selected when recording transactions.

Most businesses will find that numerical codes that are three to five digits long will provide a good balance of information. A chart of accounts can be thought of as a filing system for your financial accounts. Not only does the chart of accounts sort these financial accounts by category, it also assigns each one a unique name and numerical code.

In addition, the operating revenues and operating expenses accounts might be further organized by business function and/or by company divisions. Here is a way to think about a COA as it relates to your own finances. Say you have a checking account, a savings account, and a certificate of deposit (CD) at the same bank. When you log in to your account online, you’ll typically go to an overview page that shows the balance in each account. Similarly, if you use an online program that helps you manage all your accounts in one place, like Mint or Personal Capital, you’re looking at basically the same thing as a company’s COA. The relationship between journal entries and the chart of accounts is akin to the relationship between a script and its cast of characters.

Liabilities are all the debts that your company owes to someone else. This would include your accounts payable, any taxes you owe the government, or loans you have to repay. 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. To do this, she would first add the new account—“Plaster”—to the chart of accounts. 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.

An added bonus of having a properly organized chart of accounts is that it simplifies tax season. The COA tracks your business income and expenses, which you’ll need to report on your income tax return every year. A chart of accounts gives you great insight into your business’s revenue beyond just telling you how much money you earn. It shows peaks and valleys in your income, how much cash flow is at your disposal, and how long it should last you given your average monthly business expenses. In France, liabilities and equity are seen as negative assets and not account types in themselves, just balance accounts.

To create a COA for your own business, you will want to begin with the assets, labeling them with their own unique number, starting with a 1 and putting all entries in list form. The balance sheet accounts (asset, liability, and equity) come first, followed by the income statement accounts (revenue and expense accounts). Asset, liability and equity accounts are generally listed first in a COA. These are used to generate the balance sheet, which conveys the business’s financial health at that point in time and whether or not it owes money. Revenue and expense accounts are listed next and make up the income statement, which provides insight into a business’s profitability over time. The chart of accounts organizes your business’ financial accounts into easy-to-understand groups.

A chart of accounts is an important organizational tool in the form of a list of all the names of the accounts a company has included in its general ledger. This list will usually also include a short description of each account and a unique identification code number. While some countries define standard national charts of accounts (for example France and Germany) others such as the United States and United Kingdom do not. In the European Union, most countries codify a national GAAP (consistent with the EU accounting directives) and also require IFRS (as outlined by the IAS regulation) for public companies. The former often define a chart of accounts while the latter does not. However, since national GAAPs often serve as the basis for determining income tax, and since income tax law is reserved for the member states, no single uniform EU chart of accounts exists.

The chart of accounts is designed to be a map of your business and its various financial parts. Expense accounts are all of the money and resources you spend in the process of generating revenues, i.e. utilities, wages and rent. It’s important to set up the chart of accounts correctly the first time around, since you should use the same system from year to year what is the extended accounting equation to maintain consistency. A company can use, create, or modify any format that it wishes. But experience has shown that the most common format organizes information by individual account and assigns each account a code and description. What’s important is to use the same format over time for the consistency of period-to-period and year-to-year comparisons.