What is a chart of accounts and how does it work? (2024)

What is chart of accounts (COA)?

Achart of accounts(COA) is a financial, organizational tool that provides an index of every account in anaccounting system.

This provides an insight into all thefinancial transactionsof the company. Here, anaccountis a unique record for each type of asset,liability, equity, revenue and expense.ACOAincludes manysubcategoriesfor each account.

What is the purpose of a chart of accounts?

In practice, theCOAserves as the foundation for a company's financial record-keeping system. It provides a logical structure that facilitates the addition of new accounts and the deletion of old accounts.

The organization of accounts within theCOAvaries from company to company. It usually consists of theaccountsthat a company has identified and made available forrecording transactionsin itsgeneral ledger. This can be done withaccounting software.

For ease of use, aCOAcontains the list ofaccounts' names, brief descriptions, account type, account balance andaccount codesfor each sub-account.

Samplechart of accounts

To better understand this, consider your personalfinancial statement. Let's say you have a checking account and a savings account. You regularly use your checking account for your day-to-day expenses. Further, you also use twocredit cardsregularly.

Yourfinancial statementwill provide details of thecash flow (i.e., credit anddebitbalance). This includes your monthly income, expenses and debt. The same, when produced for a company, is theCOA.

Within the COA, accounts will be typically listed in order of their appearance in the financial statements. Typically, balance sheet accounts, including current assets and current liabilities, are listed first.

This is followed by the income statement, which includes revenue and expense accounts. This can be further divided into operating expenses, operating revenues, nonoperating expenses and nonoperating revenues.

A COAfor asmallbusiness might have the following sub-accounts:

Asset accounts:

• Cash
• Savings account
• Prepaid expenses
• Accounts receivable
• Real estate

Liabilitiesaccounts:

• Accountspayable
• Accruedliabilities
• Income taxpayable
• Depreciation

Creating achart of accounts

A chart of accounts will likely be as large and as complex as a company itself. An international corporation with several divisions may need thousands of accounts, whereas a small local retailer may need as few as one hundred accounts.

An important purpose of a COA is to segregate expenditures, revenue, assets and liabilities so viewers can quickly get a sense of a company's financial health. A well-designed COA not only meets the information needs of management, it also helps a business to comply with financial reporting standards.

A company has flexibility in creating aCOAthat suits its needs. Within the categories of operating revenues and operating expenses, for instance, accounts might be further organized by business function or by company divisions. They need to be mindful of theGenerally Accepted Accounting Principles and theFinancial AccountingStandards Board, however.

Companies should also ensure that the COA format remains the same over a period of time. Changes to a COA in theshort termcan make it challenging to analyze the difference in a company'sfinancial health over the long term.

See financial consolidation, enterprise resource planning, financial controller, accounts receivable, Accounts payable, financial reporting and ERP finance module.