A company’s financial accounts are listed in a chart of accounts (COA), which is used to prepare financial statements. Learning about a chart of accounts can improve an organization’s financial performance, regardless of your training in accounting or management. Investing in this topic’s research can benefit your business and improve the way you interact with stakeholders and other organizations.
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What is a Chart of Accounts?
The account names a company uses to categorize transactions and maintain track of its finances are listed in a COA. A COA is used to aggregate transactions, which makes it easier to track the money coming into and going out of the business.
COAs normally consist of five main accounts, each of which has a number of subaccounts. For example, most QuickBooks Online plans allow for up to 250 accounts. If the small business’s accounts are set up efficiently, the typical one shouldn’t exceed this limit. Making sure of this is something your accountant or bookkeeper can help with.
Chart of Accounts Sample
A sample chart of the accounts list is shown below. This is for a made-up company called Doris Orthodontics.
|Doris Green, Equity
|Doris Green, Withdrawals
The Balance Sheet Accounts
These accounts are referred to as balance sheet accounts because they are required in order to create a balance sheet for your company, one of the most often used financial statements. There are three kinds of balance sheet accounts that are:
Asset accounts keep track of all the resources that your company owns and add value. They can be physical assets such as real estate, equipment, and money or intangible ones like software, patents, and trademarks.
All of the debts owed by your company are listed in liability accounts. Accounts payable, wages payable, and invoices payable are common examples of liability accounts with the word payable in their names. Another category of liability account is unearned revenues; these are usually monetary payments that your company has received before the services are delivered.
Equity accounts are a little bit more abstract.. They stand for what is left of the business after all the company’s liabilities and assets have been taken into account. They basically assess the company’s value to its owner or shareholders.
The Income Statement Accounts
The income statement, which is another important type of financial statement, is generated using the accounts for the income statement.
Any income your company receives from the sale of goods, services, or rent is recorded in revenue accounts.
The money and resources you use to generate income, such as rent, wages, and utilities, are all included in expense accounts.
One general rule to keep in mind is that revenues increase your company’s equity and asset accounts, while expenses decrease your assets and equity. The relationship between the balance sheet and income statement accounts is complex.
Why is the Chart of Accounts Important?
You need to have all of your accounts set out in front of you, such as a map, unless you know the names of every single account in your books by heart.
The chart of accounts is basically designed to be a map of your business and its various financial parts.
The most important accounts for the business should be separated out in a well-designed chart of accounts, which also makes it clear which transactions get recorded in which account.
It should make it simpler for you to follow financial reporting rules, enable you to make smarter decisions, and provide you with a correct picture of your company’s financial health.
How to Adjust Your Chart of Accounts?
The guidelines for making changes to your chart of accounts are straightforward: feel free to add accounts at any time during the year, but wait on deleting previous accounts until the end of the year. Your books might be messed up if you delete an account in the middle of the year.
Let’s say Doris realizes in the middle of the year that her orthodontics practice is spending a lot more money on plaster because her inept intern keeps combining it with the wrong amount of water to powder.
Doris can choose to open a new account specifically for the plaster rather than adding it to the Lab Supplies costs account.
For this, she would first update the chart of accounts to include the new account Plaster.
After that, she would create an adjusting entry to transfer all of the plaster-related costs she had already recorded in the “Lab Supplies” expenditures account to the brand-new Plaster expenses account.
At that point, if she had previously paid $2,000 on plaster, the adjusting entry would seem as follows:
How Does a Chart of Accounts Work?
To keep your books organized, every transaction you record in accounting is categorized based on its account and subaccount. The chart of accounts lists these accounts and subaccounts along with their balances.
There are five main types of accounts in a primary chart of accounts:
For example, the balance of an expense account shows the amount of money spent on running your business, whereas the balance of a liabilities account displays the amount of money owed by your business.
You may also see a view register option next to an account name when you use your accounting software to refer to your chart of accounts. This makes it simpler for you and your accountant to identify problems and misclassifications because it provides a history of all the transactions ever connected to that account. Each account usually includes a description and an account number.
How a Chart of Accounts Benefits Your Small Business
The primary accounts in your COA help in grouping transactions into logical groups that you may use to analyze the financial position of your business. The balance sheet and income statement, two of the most important financial reports, are created using information from the chart of accounts primary accounts.
How is a Chart of Accounts Organized?
Accounts for assets, liabilities, and equity are often listed first in a chart of accounts. These are used to create the balance sheet, which conveys the company’s current financial situation and whether it is in debt. Following are the revenue and spending accounts that make up the income statement, which provides light on a company’s profitability over time.
The typical orders of these key account types in a COA are shown in the table below. Defined account categories are also included, along with examples of the kinds of transactions or sub-accounts each one might include.
- Assets: Whatever valuable asset that your company owns. Assets will include the following.
- Accounts receivable
- Liabilities: Any debt that your company owes. Liabilities will include the following.
- Accounts payable
- Business loans
- Taxes payable
- Equity: Whatever is left after subtracting a company’s liabilities from its assets. The following possible assets are available.
- Common stock.
- Preferred stock.
- Retained earnings.
- Revenue: The revenue that your company receives from the sale of its goods or services. Revenue accounts can include the following.
- Interest revenue
- Sales or operating revenue
- Expenses: All the different kinds of money and resources that a business uses to try to make money. Subtract expenses from income to get net income. The following may be included in expense accounts.
- Travel Expenses
- Utility bills
- Cost of Goods Sold
Chart of Accounts Best Practices
- Wait to delete old accounts: It’s better to wait to delete old accounts until the end of the year in order to avoid messing up your books. Account renaming or merging might be a hassle during tax season. But you can always add more accounts.
- Don’t overextend yourself with your accounts: Make a COA that gives you important information. This does not imply that every aspect of every transaction must be recorded. Both a separate account and a separate account for each utility are not necessary for each goods you sell. Some things can be grouped together.
- Try to be consistent: You have to create a COA that doesn’t vary significantly from year to year. By doing so, you may compare how various accounts have performed over time, giving you important information about how you are managing the finances of your business.
- Delete old accounts: Review all of your accounts towards the end of the year to see if there is a chance for consolidation. Managing your accounts will be easier as a result.
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Frequently Asked Questions
What is a Chart of Accounts?
A chart of accounts is a tool that identifies every account in the general ledger and gives each one a unique number to make it easier to find it in the appropriate accounting book. To find where expenses and earnings are coming from, stakeholders might consult the COA, balance sheet, and income statement.
What Distinguishes and Categorizes Asset and Liability Accounts?
Assets include things like bank accounts, real estate, prepaid expenses, and accounts receivable. These are categorized on a positive/negative scale. Accounts payable, loans, credit card debt, and other expenses that are past due are examples of liabilities. Liabilities often have the adjective payable (i.e., AP) attached to them.
Why is a Chart of Accounts Important?
It is an important financial instrument that arranges a lot of financial transactions in an accessible manner. Transactions are easily found and evaluated because they are shown as line items in the display. This is essential for giving stakeholders and investors a bird’s-eye view of a company’s financial information.
Is There a Single COA Format?
Not exactly. Any format that a business chooses may be used, created, or changed. However, experience has shown that grouping information into different accounts and giving each one an identifier and description is the most typical structure. The consistency of period-to-period and year-to-year comparisons depends on using the same format over time.
What Are The Types of Charts of Accounts in SAP?
The categories of a COA in SAP are as follows:
1. Operating COA: It consists of the expenses and revenue accounts that are used to record regular business transactions.
2. Group COA: It consists of basic accounts that are used by all business units at the corporate level.
3. Country-Specific COA: This COA is helpful for MNCs because it allows them to keep their accounts up to date with each nation’s legal requirements.