What is Chart of Accounts COA: Definition, Examples & Structure

Intuit accepts no responsibility for the accuracy, legality, or content on these sites. Accounting systems have a general ledger where you record your accounts to help balance your books. Keeping your accounts in place and up-to-date is important for analyzing your finances. This granularity aids in precise tracking and management of finances. In order to keep the number of accounts down to a manageable level, you may periodically review the list and close any accounts that are not fully utilized.

Expense accounts

We often call the assets, liabiliies and equity accounts the balance sheet accounts, as they participate in forming a company’s balance sheet. The remaining revenue and expenses accounts fall into the profit and loss accounts, as they appear in this financial statement. The main accounts within your COA help organize transactions into coherent groups that you can use to analyze your business’s financial position. In fact, some of the most important financial reports — the balance sheet and income statement — are generated based on data from the COA’s main accounts. 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. You may also wish to break down your business’ COA according to product line, company division, or business function, depending on your unique needs.

When speaking of revenue, we usually mean the income a company earns from its primary business activities, such as selling goods or providing services. It’s the total money generated from these activities before deducting any expenses. These resources have economic value and are expected to provide future benefits. These can include cash, inventory, equipment, buildings, and investments. The chart of accounts deals with the five main categories, or, if you will, account types. Income is often the category that business owners underutilize the most.

This would include Owner’s Equity or Shareholder’s Equity, depending on your business’s structure. The basic equation for determining equity is a company’s assets minus its liabilities. Although most accounting software packages like Quickbooks come with a standard or default list of accounts, bookkeepers can set up and customize their account structure to fit their business and industry. These standards provide guidelines for financial reporting, including the structure of the COA. So, separating these additional accounts allows businesses to understand the specific drivers of their financial performance in more detail. Gains and losses represent the money earned or lost from activities outside the company’s primary operations.

Delivered as SaaS, our solutions seamlessly integrate bi-directionally with multiple systems including ERPs, HR, CRM, Payroll, and banks. A well-structured COA provides a comprehensive view of financial activities, enabling detailed analysis for informed decision-making. It aids in identifying oklahoma city bookkeeping services spending trends, profitable areas, and potential savings that are crucial for strategic planning and budgeting.

Determine the structure of your COA

1. That doesn’t mean recording every single detail about every single transaction.
2. A member of the CPA Association of BC, she also holds a Master’s Degree in Business Administration from Simon Fraser University.
3. The COA helps businesses manage their money wisely, giving them a tool for keeping track of cash flow, creating accurate financial reports, facilitating budgeting, and cost control.
4. Incorporating the Maker Checker Workflow adds an additional layer of accuracy and control by implementing a dual-approval process for all entries and adjustments made to the COA.
5. This would include Owner’s Equity or Shareholder’s Equity, depending on your business’s structure.
6. On the other hand, organizing the chart with a higher level of detail from the beginning allows for more flexibility in categorizing financial transactions and more consistent historical comparisons over time.

On one hand, keeping the number of accounts to a minimum will make the accounting system more straightforward to use. For standardization purposes, many industry associations publish recommended charts of accounts for their respective sectors. In addition to the universal general accounts that are prevalent in most entities, each entity will include certain accounts that are particular to its industry sector.

Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. It also helps managers plan budgets and see which business areas are making money and which might need extra attention. Equity can fall into several accounts, reflecting different aspects of ownership in the company.

The Industrial Revolution resulted in technological advancements and changes in production methods. At this point, they demanded a more structured and standardized approach to accounting to help them track their finances, manage inventories, control costs, and assess their financial performance. The specific accounts and their numbering may vary by company, industry, or specific accounting standards adopted.

COA Structure

So, when setting up your accounting system, you create the COA in this order. A general ledger stores a detailed record of a company’s financial activities, facilitating the preparation of financial statements and performance analysis. It works as a guide to all the components a business employs to categorize and log financial activities within its accounting framework. The chart of accounts helps you organize your transactions into a convenient view of how the money moves through your business.

Instead of recording it in the “Lab Supplies” expenses account, Doris might decide to create a new account for the plaster. Without a chart of accounts, it’s impossible to know where your business’s money is. The chart of accounts is like a map of your business and its various financial parts. An easy way to explain this is to translate it into personal finance terms. When you log into your bank, typically you’ll get a dashboard that lists the different accounts you have—checking, savings, a credit card—and the balances in each. But experience has shown that the most common format organizes information by individual account and assigns each account a code and description.

By the end of this blog, you’ll learn what a COA is, and how to set one up effectively. A chart of accounts is a critical tool for tracking your business’s funds, especially as your company grows. 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. Just remember that while you can add an account to the chart at any time throughout the financial year, you should not delete any accounts until the end of an accounting period.

A chart of accounts (COA) is grouped into main categories such as assets, liabilities, equity, revenue, and expenses for clear financial reporting. This categorization accounts payable software simplifies the preparation and analysis of financial statements, helping organizations track their financial health efficiently. 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.

Incorporating the Maker Checker Workflow adds an additional layer of accuracy and control by implementing a dual-approval process for all entries and adjustments made to the COA. This method significantly mitigates the risk of errors and fraud, reinforcing the reliability of the financial data. Maintain consistency in how transactions are recorded and categorized. This consistency should extend across all accounts to ensure that the data is comparable and reliable.

It’s a fundamental accounting framework you use to organize your financial records and build reporting around. With online accounting software, you can organize and track your balance sheet accounts. No matter if you’re an entrepreneur starting a business or an owner looking to streamline your practices, accounting software can help you get the job done. As your business grows, so will your need for accurate, fast, and legible reporting. Your chart of accounts helps you understand the past and look toward the future.

Essentially, if you placed the statements of financial position and performance on top of each other, you would come up with the chart of accounts. That doesn’t mean recording every single detail about every single transaction. You don’t need a separate account for every product you sell, and you don’t need a separate account for each utility. An expense account balance, for example, shows how much money has been spent to operate your business, whereas a liabilities account balance shows how much money your business still owes. In accounting, each transaction you record is categorized according to its account and subaccount to help keep your books organized. These accounts and subaccounts are located in the COA, along with their balances.