Chart of Accounts Definition, How to Set Up, Categories

When we speak of a chart in the accounting context, we usually mean the arrangement or layout of different accounts within a general ledger. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. These are familiar sentiments to anyone who has sat through a few financial meetings. The discussion flows and inevitably someone says “It would be nice if we could see…” The CFO gets an exasperated expression on their face and writes the request on their notepad.

1. Expense accounts are all of the money and resources you spend in the process of generating revenues, i.e. utilities, wages and rent.
2. For example, assume your cash account is and your accounts receivable account is 1-002, now you want to add a petty cash account.
3. The chart of accounts is not just a regular financial document but rather it is an integral part of strategic financial management and informed decision-making.
4. The discussion flows and inevitably someone says “It would be nice if we could see…” The CFO gets an exasperated expression on their face and writes the request on their notepad.

From there, you can get even more detailed, further categorizing items by their business function, company divisions, product and service lines, and more. Therefore, while every COA uses the same building blocks – balance sheet and income statement accounts – how deep you delve into each of those blocks is up to you. Think of your chart of accounts as a roadmap across your operations, indexing all of your different financial accounts in an organized, consumable way.

Defining Chart of Accounts (COA)

Before recording transactions into the journal, we should first know what accounts to use. 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.

Additional Resources

Here’s how to categorize transactions in QuickBooks Online and navigate the COA. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. 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.

This sample chart of accounts also includes a column containing a description of each account in order to assist in the selection of the most appropriate account. Liability accounts also follow the traditional balance sheet format by starting with the current liabilities, followed by long-term liabilities. The number system for each liability account can start from 2000 and use a sequence that is easy to follow and compare in different accounting periods. Size – Set up your chart to have enough accounts to record transactions properly, but don’t go over board. The more accounts you have, the more difficult it will be consolidate them into financial statements and reports. Also, it’s important to periodically look through the chart and consolidate duplicate accounts.

How Charts of Accounts (COA) Work

Accounting software frequently includes sample charts of accounts for various types of businesses. It is expected that a company will expand and/or modify these sample charts of accounts so that the specific needs of the company are met. Once a business is up and running and transactions are routinely being recorded, the company may add more accounts or delete accounts that are never used. 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. A chart of accounts is a catalog of account names used to categorize transactions and keep your business’s financial history organized.

In manufacturing, the production process involves different stages, such as raw materials, work in progress, and finished goods. The chart of accounts helps keep track of these stages with the Raw materials inventory, Work-in-progress inventory, and Finished goods inventory accounts, monitoring https://intuit-payroll.org/ the value at each production step. Consider integrating it with all your sales sources and payment systems to create a single source of truth about your business finances. Book your free seat at our demo of try Synder for free to see how it can help you manage your business more efficiently.

This consistency ensures that accurate comparisons of the company’s finances can be made over time. To facilitate quick location of specific accounts, each COA typically features an identification code, name, and a brief description. Businesses can adjust their COAs to reflect their size and nature, ensuring that the tool remains relevant and useful over time. The financial world is filled with terms that can seem intimidating to someone without a strong finance background. The chart of accounts is full of details and can contain a huge amount of data entries and rows in Excel. Just remember that while you can add an account to the chart at any time throughout the financial year, you should not delete any accounts until the end of an accounting period.

In certain industries such as advertising, farming, or consulting, most of the costs run together under the broad category of operating expenses. In that environment, it may not be necessary to separate costs between direct/indirect and operating, and there will be no gross margin on the financials. Some accountants recommend sticking with a GAAP-oriented chart of accounts and generating management-oriented financials through custom reports.

It only includes revenues related to the core functions of the business and excludes revenues that are unrelated to the main activities of the business. Companies often use the chart of accounts to organize their records by providing a complete list of all the accounts in the general ledger of the business. The chart makes it easy to prepare information for evaluating the financial performance of the company at any given time.

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. While the chart of accounts can be similar across businesses in similar industries, you should create a chart of accounts that is unique to your individual business.

This coding system is crucial because a COA can display a multitude of line items for each transaction in every primary account. The structure of a COA can vary depending on the company’s size and the nature of its business. However, most COAs follow a specific structure, which is designed to mirror the order of information as it appears in financial statements. For example, many accounts that are essential in manufacturing are not commonly used by retail businesses, including the composition of cost of goods sold (COGS). Since different types of entities use different types of accounts, there is no one single chart of accounts template that would be applicable to all businesses. The accounting software then aggregates the information into an entity’s financial statements.

A chart of accounts is an essential document that numbers all the financial transactions conducted by a company in an accounting period. 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. Setting up a chart of accounts can provide a helpful tool that enables a company’s management to easily record transactions, prepare financial statements, and review revenues and expenses in detail. As you can get it, the purpose of using accounts in accounting is to facilitate accurate record-keeping, financial analysis, and the preparation of financial statements. Month-end financial statements (balance sheet and income statement) simply summarize and group the balances that are in the individual accounts at month end.

But ultimately, how effective it is in informing your decision-makers and ensuring an efficient record-to-report process is up to you. So take our template, along with the many insights and tips we’ve discussed, and build a COA that drives real success for your organization. Every company is different so, depending on your operations, industry, and other critical factors, the template is only as good as you make it. Now, that said, we’d be remiss if we didn’t boast a bit and say that Embark’s COA template is a heckuva starting point.

Simply put, without an informative chart of accounts that’s customized to your particular needs, your decision-makers are leading your organization with blinders on. Now, according to the standard definition of a COA, it should focus on the many different turbotax checklist accounts tying into your company’s general ledger. And while your GL certainly plays a significant role, our advice is not to be so hyper-focused on the GL that you fail to integrate other dimensions and company attributes into your COA.

Obviously, that makes your chart of accounts essential to a host of different people and groups, from your decision-makers and stakeholders to potential investors and lenders. But just because it’s important doesn’t mean it’s intuitive or straightforward, at least without true expertise guiding the way. We provide third-party links as a convenience and for informational purposes only. Intuit does not endorse or approve these products and services, or the opinions of these corporations or organizations or individuals.