Chart of Accounts COA Definition & Set Up

what is a chart of accounts

Charts of accounts can follow many different structures and can be modified to meet almost any size or type of business. The flexibility means that they can be adapted to fit your needs, but it can make things a bit tricky when creating your first chart of accounts. Typically, they all follow the essential structure described below. But the final structure and look will depend on the type of business and its size.

The income statement accounts

  1. It also includes account type definitions along with examples of the types of transactions or subaccounts each may include.
  2. For instance, if an account’s name or description is ambiguous, the bookkeeper can simply look at the prefix to know exactly what it is.
  3. A chart of accounts gives you great insight into your business’s revenue beyond just telling you how much money you earn.
  4. 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.

You don’t want your chart of accounts to be too granular or too broad. It should have enough subcategorization and detail to be useful — but not so much that nearly every transaction requires a different account. Most businesses will find that numerical codes that are three to five digits long will provide a good balance of information.

Organize account names into one of the four account category types

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. Basically, a chart of accounts provides a single centralized reference that lists and organizes all financial accounts across the entire business. So, why would you add these additional layers in the chart of account number? Additional account coding can make it easier to create financial statements. For example, in the preceding table, total cash can be determined by adding all accounts preceded with 10-10.

The Building Blocks of Financial Statements

what is a chart of accounts

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. Need help choosing the right accounting software for your needs?

In the interest of not messing up your books, it’s best to wait until the end of the year to delete old accounts. Merging or renaming accounts can create headaches come tax season. In accounting, each transaction you record is categorized according to what is operating income operating income formula and ebitda vs operating income its account and subaccount to help keep your books organized. These accounts and subaccounts are located in the COA, along with their balances. Revenue accounts keep track of any income your business brings in from the sale of goods, services or rent.

In accounting software, using the account number may be a more rapid way to post to an account, and allows accounts to be presented in numeric order rather than alphabetic order. A chart of accounts is a list of all your company’s “accounts,” together in one place. It provides you with a birds eye view of every area of your business in a process costing system the number of wip inventories that spends or makes money. The main account types include Revenue, Expenses, Assets, Liabilities, and Equity. A chart of accounts lists all of the account names in a company’s general ledger. This financial organization tool categorizes these accounts by type and gives a clearer picture of a company’s financial health.

what is a chart of accounts

Now, the trial balance (the summary of all account balances) checking account balance reflects $125,453 at the end of May which is included in the financial statements. As your business grows, so will your need for accurate, fast, and legible reporting. Your chart of accounts helps you understand the past and look toward the future. A chart of accounts should keep your business accounting error-free and straightforward. This will allow you to quickly determine your financial health so that you can make intelligent decisions moving forward.

For example, if a company makes a sale, it debits an asset account (like Accounts Receivable or Cash) and credits a revenue account (Sales Revenue), as defined in the COA. The company records each transaction (journal entry or accounting entry) in the general ledger account, and the general ledger totals create the trial balances. Charts of accounts are an index, or list, of the various financial accounts that can be found in your company’s general ledger. These accounts are separated into different categories, including revenue, liabilities, assets, and expenditures. This numbering system helps bookkeepers and accountants keep track of accounts along with what category they belong two. For instance, if an account’s name or description is ambiguous, the bookkeeper can simply look at the prefix to know exactly what it is.

Companies in different lines of business will have different looking charts of accounts. The chart of accounts for a major airline will have a lot more references to “aircraft parts” than your local cat cafe. Your chart of accounts is a living document for your business and because of that, accounts will inevitably need to be added or removed over time. The general rule for adding or removing accounts is to add accounts as they come in, but wait until the end of the year or quarter to remove any old accounts.

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. For example, a company may decide to code assets from 100 to 199, liabilities from 200 to 299, equity from 300 to 399, and so forth. Those could then be broken down further into, e.g., current assets ( ) and current liabilities ( ). The number of figures used depends on the size and complexity of a company and its transactions. More complex entities may have longer account codes to accommodate the reporting needs of the entity.

With online accounting software, you can organize and track your balance sheet accounts. No matter if you’re an entrepreneur starting a business or an owner looking to streamline your practices, accounting software can help you get the job done. 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. A business transaction will fall into one of these categories, providing an easily understood breakdown of all financial transactions conducted during a specific accounting period. Traditionally, each account in the COA is numbered, and accountants can quickly identify its type by the first digit.