Chart of Accounts: Complete Guide + Examples

Accounts are classified into assets, liabilities, capital, income, and expenses; and each is given a unique account number. A well-designed chart of accounts should separate out all the company’s most important accounts, and make it easy to figure out which transactions get recorded in which account. Liability accounts usually have the word “payable” in their name—accounts payable, wages payable, invoices payable.

Double-entry bookkeeping introduced the concept of recording transactions with corresponding debits and credits, enhancing the accuracy of financial records. While Pacioli’s work laid the foundation for modern accounting, a standardized chart of accounts had yet to emerge. Size – Set up your chart to have enough accounts to record transactions properly, but don’t go over board.

You may also wish to break down your business’ COA according to product line, company division, or business function, depending on your unique needs. A chart of accounts is an essential document that numbers all the financial transactions conducted by a company in an accounting period. While the chart of accounts can be similar across businesses in similar industries, you should create a chart of accounts that is unique to your individual business.

As we said before, an effective COA begins with two essential building blocks – balance sheet accounts and income statement accounts. 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 payroll calculator 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. It is basically a listing of all the accounts found in the general ledger that the business will use to code each bookkeeping transaction. This sample chart of accounts provides an example using some of the most commonly found account names.

  1. You capture this sort of loss in the non-operating category to separate it from typical operating expenses.
  2. Basically, a chart of accounts provides a single centralized reference that lists and organizes all financial accounts across the entire business.
  3. It’s a way to capture changes in the company’s financial position that might not immediately affect profits.
  4. Balance sheet accounts like assets, liabilities, and shareholder’s equity are shown first, and then come income statement accounts like revenue and expenses, in the order they appear on your financial statements.

The chart of accounts forms the foundation upon which the financial reports are built. A chart of accounts ensures that each transaction is mapped to the correct account, reducing financial errors across the business. It supports better money management and improves the overall financial health of the business. Take note that the chart of accounts of one company may not be suitable for another company. In any case, the chart of accounts is a useful tool for bookkeepers in recording business transactions. Revenue accounts capture and record the incomes that the business earns from selling its products and services.

Therefore, it pays to be meticulous when either setting up, adjusting, or customizing your chart of accounts. At the risk of sounding repetitive, being thorough on the front-end will save you much heartache on the backend. Of course, your particular industry will also determine how you customize your COA.

The chart of accounts is not just a regular financial document but rather it is an integral part of strategic financial management and informed decision-making. With real-time reporting capabilities, AP automation solutions provide immediate access to financial data, facilitating quick and informed decision-making. They also support compliance efforts by keeping up with the latest accounting standards and tax laws. Provide each account with a clear title and a brief description that outlines the types of transactions it should capture. Ensure that everyone involved in financial management and bookkeeping understands the account titles and uses them correctly, which will help maintain the integrity of your financial data.

Governance enables the maintenance and creation of accounting segments, policies, and processes. The governance body should include key stakeholder groups, such as controllership, FP&A, tax, compliance, and business technology. The CoA sets the foundation for finance and accounting transactional processing and is instrumental in supporting accurate and timely external financial reporting, management reporting, and global consolidation. If you don’t leave gaps in between each number, you won’t be able to add new accounts in the right order. For example, assume your cash account is and your accounts receivable account is 1-002, now you want to add a petty cash account.

An expense account named Professional fees can be added to monitor costs for hiring professionals. The COA also includes accounts for online payment systems to monitor digital transactions. Add an account statement column to your COA to record which statement you’ll be using for each account–cash flow, balance sheet, or income statement.

Equity accounts will vary significantly based on the structure of the business. For instance, whether it’s a corporation, partnership, or sole proprietorship. To do this, she would first add the new account—“Plaster”—to the chart of accounts. Expense accounts are all of the money and resources you spend in the process of generating revenues, i.e. utilities, wages and rent.

Time Value of Money

Like we said above, accounting software can actually generate a chart of accounts for you, which is very convenient. The best accounting software will also use the information in your chart of accounts to automatically generate financial reports, so you can make evidence-based decisions. 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.

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Accounting software products generally set you up with a basic chart of accounts that you can work with your accountant or bookkeeper to amend, according to your industry and your business’s complexity. 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 ( ).

Link your accounts

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Revenue, the lifeblood of any business, is a general metric for evaluating its financial performance. It encompasses various sources of income that contribute to the overall growth and sustainability of the organization. Doing so ensures that accurate comparisons of the company’s finances can be made over time. Every company is different so, depending on your operations, industry, and other critical factors, the template is only as good as you make it.

The income statement accounts

Revenue and expense accounts are listed next and make up the income statement, which provides insight into a business’s profitability over time. There are five main account type categories that all transactions can fall into on a standard COA. These are asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts. If necessary, you may include additional categories that are relevant to your business. To create a COA for your own business, you will want to begin with the assets, labeling them with their own unique number, starting with a 1 and putting all entries in list form.

Chart of accounts best practices

The average small business shouldn’t have to exceed this limit if its accounts are set up efficiently. We believe everyone should be able to make financial decisions with confidence. Without crystal clear directions, there will inevitably be mistakes in your chart of accounts, often out of confusion. Once that occurs, you immediately damage trust in your chart’s accuracy and reliability, usually necessitating a COA rebuild.

Traditionally, each account in the COA is numbered, and accountants can quickly identify its type by the first digit. For example, asset accounts for larger businesses are generally numbered 1000 to 1999 (or 100 to 199), and liabilities are generally numbered 2000 to 2999 (or 200 to 299). Small businesses with fewer than 250 accounts might have a different numbering system. The table below reflects how a COA typically orders these main account types.

If you have many financial accounts, you can break those down into further subcategories — such as operating revenues or non-operating losses — to keep everything organized. You can even break them up further by business function or company division if you need to, but most small-business owners don’t need to get that granular. Liability accounts also follow the traditional balance sheet format by starting with the current liabilities, followed by long-term liabilities. The number system for each liability account can start from 2000 and use a sequence that is easy to follow and compare in different accounting periods. The Chart of Accounts is one of those unknown parts of your accounting software we don’t even think about.

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