What is a Chart of Accounts? A How-To with Examples Bench Accounting

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• This helps in organizing the accounts systematically and simplifies the process of adding new accounts in the future.
• The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
• Each account in this example can be further detailed or expanded based on the specific needs of the business, such as adding separate accounts for different types of services or inventory.
• Accordingly, the information provided should not be relied upon as a substitute for independent research.
• Similar to a chart of accounts, an accounting template can give you a clear picture of your business’s financial information at a glance.

Double-entry bookkeeping

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. 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. This will help you organize your financial transactions and generate accurate financial reports.

Is There a Single COA Format?

In other words, it all starts with the chart of accounts, flows into the ledger accounts, and finally into your ERP system. Therefore, a well-formed and organized COA allows you to draw a direct line between a transaction and how it flows into your financial statements. 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. The chart of accounts often abbreviated to COA, is the foundation of the double entry bookkeeping system.

How can a chart of accounts be used in financial reporting?

Once you have an adequate system in place, then it’s not a problem to tweak your COA by adjusting account categories when needed. We suggest proceeding with caution with your adjustments, however, as you want to make sure you are consistent and logical. For example, if you have unneeded categories in your COA, it’s usually not a good idea to eliminate them mid-period due to possible orphaned data in your financial statements.

Compliance and standardization

But just because it’s important doesn’t mean it’s intuitive or straightforward, at least without true expertise guiding the way. Well, that’s exactly how someone looking through your financials would feel if it wasn’t for the accounting equivalent of that life-saving index – the chart of accounts (COA). The use of such advanced technology in managing the COA leads to greater efficiency in financial reporting and more informed strategic decision-making across the organization. Ensure your COA aligns with applicable accounting standards and legal requirements. Ensure that the numbering leaves room for additional accounts to be added as the business grows. A chart of accounts lists down all accounts used by an entity in its accounting system.

Add financial statements

All these asset accounts fall into either current or non-current assets. Want to turn your accounting into a powerfull business management tool? how to calculate fixed cost Consider integrating it with all your sales sources and payment systems to create a single source of truth about your business finances.

Debiting increases certain accounts’ balances and decreases others while crediting has the opposite effect. QuickBooks Online automatically sets up a chart of accounts for you based on your business, with the option to customise it as needed. Back when we did everything on paper, or if you’re using a system like Excel for your bookkeeping and accounting, 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. Revenue accounts keep track of any income your business brings in from the sale of goods, services or rent.

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. The difference is that most businesses will have many more types of accounts than your average individual, and so it will look more complex; however, the function and the concept are the same. Essentially, the chart of accounts should give anyone who is looking at it a rough idea of the nature of your business by listing all the accounts involved in your company’s day-to-day operations. 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 short, it is an organizational tool that lists by category and line item all of the financial transactions that a company conducted during a specific accounting period. 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.

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. Accurate data recording lies at the heart of preparing a COA, and Journal Entry Management simplifies the creation and management of journal entries. From automating journal entry preparation to automated posting, it significantly reduces the potential for human error and ensures consistent, accurate record-keeping. This is particularly beneficial for managing a COA efficiently, as it allows for real-time updates and minimizes discrepancies in financial data.

The Chart of Accounts is an indispensable tool in the realm of accounting, vital for accurate and efficient financial management. Understanding its structure, types, and best practices is key to maintaining an organized financial record-keeping system. The Chart of Accounts (COA) is a foundational tool in accounting, serving as the backbone of a company’s financial recordkeeping system. This guide offers an in-depth exploration of the chart of accounts, providing definitions, an example, and a downloadable template to enhance your financial organization and reporting. As mentioned, besides the standard five accounts, the chart of accounts may contain additional accounts, created for the sake of more granularity or to cater to a business’s particular needs. They can vary, but the most typical here are the COGS, gains and losses, and other comprehensive income accounts.