WHAT EXACTLY IS A CHARTER OF ACCOUNTS?

A chart of accounts (COA) is an index of all the accounts in the general ledger (GL) of a firm.

A COA is organised by categorising accounts under the following key categories: assets, liabilities, equity, income, and costs. The accounts are numbered consistently, such that all spending accounts, for example, are issued a 500 number.

The COA provides an overview of the financial data that a company collects in its accounts. As a result, a good COA may assist guarantee that the correct data is obtained. Continue reading to learn how a COA works and how it can help you gain better control and management of your business.

Definition of Chart of Accounts

A chart of accounts (COA) is a detailed listing of every account in the general ledger, divided into subcategories. As such, it is an organising tool that aids in the identification of certain accounts. A COA is just a table of contents for the general ledger in that respect.

The account names, account description, and account number are the fundamental components of a COA. Because the account numbers do not run sequentially, additional numbers may be placed into the gaps.

The account names in the COA are normally listed in the order in which they appear in the financial statements. That is, balance sheet accounts like as assets, liabilities, and shareholders’ equity are mentioned first, followed by income statement accounts (i.e., revenues and expenses).

List of Charts of Accounts

The Chart of Accounts (COA) may be used as a summary. Its objective in this scenario is to offer an overview of the data groups or accounts that hold information of the same kind. The characteristics of a COA are shown in the basic example above. The accounts are numbered in such a way that a continuous sequence of numbers is assigned to accounts of a certain kind. Accounts for assets are 100s, accounts for liabilities are 200s, and so on. Additional accounts may be introduced in between thanks to the numbering. As a result, a new liability account would have a value in the 200s.

Depreciation is recorded as an asset account. This is due to the fact that accumulated depreciation accounts are linked to (fixed) assets. Accumulated depreciation accounts are a kind of contra account that reduces the value of the related asset. So, if the buildings asset account has a balance of $500,000 and the accumulated depreciation — buildings account has a balance of $300,000, the balance sheet net value of buildings is $200,000.

Why Is the Chart of Accounts Necessary?

The Chart of Accounts arranges the General Ledger accounts logically for easy reference. However, since the accounts gather information on a certain sort of transaction, the COA may be used as a tool for analysis. The GL and, by extension, the COA should accurately reflect the financial transactions that the company wishes to monitor and measure. As a result, the COA should have a logical link to the business’s Key Performance Indicators (KPIs).

Accounts in the ledger may be split to give more precise information. Instead of just one sales account, the ledger may contain many, with sales from various regions—North, East, Midwest, South, and West—going into separate accounts. This critical data would be gathered in real time as account posts are made, allowing information that may have taken hours to create to be accessible in an instant.

GL data was initially intended to generate financial reports in accordance with specified criteria, such as generally accepted accounting principles (GAAP). (GAAP compliance is mandatory for public corporations.) Private enterprises do not have to, but many do.) This is to guarantee that external users, such as investors and tax officials, can examine a company’s financial performance and situation in a consistent manner.

However, developments in information technology have made it feasible for wider usage by internal users, like as managers, by allowing for more comprehensive transaction segmentation and enhanced data analysis. In a manual system, the expenses of such extensive analysis would have exceeded the advantages.

Glossary of Accounting Terms

Account

In accounting, an account is a record of a certain sort of financial transaction (e.g., credit sales to the ABC Corp).

Major Account Categories

Assets, liabilities, equity, income, and costs are the five primary account kinds.

Asset

An asset is something valuable that a company controls or possesses. It might be physical property like buildings or inventory, or intangibles like copyright and goodwill.

Equity

The owner’s portion in a firm is referred to as equity. It is the remaining interest in assets after removing obligations.

Expense

Expenses represent the “cost” of running company. They are the expenses that a company needs spend in order to generate revenue.

Liability

A liability is a debt or obligation owing by a company to another person or organisation (the creditor) that must be paid in cash, commodities, or services.

Revenue

Revenues are the economic advantages gained by a company through the sale of its products and services. It is referred to as the “top line” in accounting (that is, the first line on the income statement).