What Is a Chart of Accounts?
A chart of accounts (COA)is an index of all of the financial accounts in a company'sgeneral ledger. 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.
Key Takeaways
- A chart of accounts is a financial organizational tool that provides a complete listing, by category, of every account in thegeneral ledgerof a company.
- It is used to organize finances and give interested parties, such as investors and shareholders, a clearer view and understanding of a company’s financial health.
- To ensure the quick location of specific accounts, each COA typically contains an identification code, name, and brief description.
- COAs can be modified by a company to fit its size and type of business.
- It's important to use the same COA format over time for the accuracy of period-to-period comparisons.
How a Chart of Accounts Works
Large and small companies use a COA to organize their finances and give interested parties, such as investors and shareholders, a clear view and understanding of their financial health. Separating expenditures, revenue, assets, and liabilities helps to achieve this and ensures that financial statements are in compliance with reporting standards.
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 acertificate 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 orPersonal Capital, you’re looking at basically the same thing as a company’s COA. You can see all your assets and liabilities on one page.
There is no single format for a 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.
COA Structure
The COA is typically set up to display information in the order that it appears in financial statements.That means that balance sheetaccounts are listed first and are followed by accounts in theincome statement.
These primary accounts of assets, liabilities, shareholders' equity, revenue, and expenses can then be broken down into sub-accounts such as operating revenues, operating expenses, non-operating revenues, and non-operating losses.
In addition, the operating revenues and operating expenses accounts might be further organized by business function and/or by company divisions.
As an example, a small company COA might include these sub-accounts under the primary assets, primary liabilities, and primary shareholders' equity accounts:
Assets
- Cash
- Savings account
- Petty cash balance
- Accounts receivable
- Undeposited funds
- Inventory assets
- Prepaid insurance
- Vehicles
- Buildings
Liabilities
- Company credit card
- Accrued liabilities
- Accounts payable
- Payroll liabilities
- Notes payable
Shareholders' equity
- Common stock
- Preferred stock
- Retained earnings
Account Identifiers
To make it easy for readers to locate specific accounts or to know what they're looking at instantly, each COA typically contains identification codes, names, and brief descriptions for accounts.
This coding system is important because the COA can display many line items for each transaction in every primary account.
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 (110-119) and current liabilities (210-219). The number of figures used depends on the size and complexity of a company and its transactions.
Many organizations structure their COAs so that expense information is separately compiled by department. Thus, the sales department, engineering department, and accounting department all have the same set of expense accounts. Examples of expense accounts includethe cost of goods sold(COGS),depreciation expense, utility expense, and wages expense.
Special Considerations
COAs can differ and be tailored to reflect a company’s operations. However, they also must respect the guidelines set out by the Financial Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP).
Of crucial importance is that COAs are kept the same from year to year. Doing so ensures that accurate comparisons of the company’s finances can be made over time.
Example
Here's one example of a chart of accounts.
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Why Is a Chart of Accounts Important?
It is a very important financial tool that organizes a lot of financial transactions in a way that is easy to access. 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.
Is There a Single COA Format?
Not precisely. 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.
Is a Chart of Accounts Required?
No, but it's considered necessary by all kinds of companies seeking to categorize all of their transactions so that they can be referenced quickly and easily.
The Bottom Line
A chart of accounts is a document that numbers and lists all the financial transactions that a company conducts in an accounting period. The information is usually arranged in categories that match those on the balance sheet and income statement.
The chart of accounts is a very useful tool for the access it provides to detailed financial information for individuals within companies and others, including investors and shareholders.
