Chart of Accounts Explained: What It Is and Why Your Business Needs One
They are generally categorized into direct and indirect expenses. Even What Is A Chart Of Accounts private companies will have shareholder equity accounts like this if they offer stock options to employees. A chart of accounts is not legally required in every jurisdiction, but here’s why you should have one anyway. In setting up a COA, it’s important to have a systematic structure that is easily understandable and scalable as the company grows. From there, you’ll choose the specific account numbers you use for each account. If you’re managing bookkeeping yourself, there may be instances you come across where it’s not entirely obvious which account you should ascribe a given entry.
Managers can analyze specific account balances to identify trends, pinpoint areas of inefficiency, or evaluate the profitability of different operations. Such insights aid strategic choices regarding investments, cost reductions, or expansion plans. A COA also simplifies tax preparation by categorizing income and expenses according to tax regulations, such as those set by the Internal Revenue Service (IRS). Analyzing a balance sheet typically involves understanding the company’s liquidity, solvency, and overall financial health. For example, comparing current assets and current liabilities can help determine a company’s liquidity, or its ability to cover short-term obligations.
Before there was accounting software, accountants used this coded method to organize the chart of accounts on paper. Those that start with two, three, four, and five represent liability, equity, revenue, and expense transactions, respectively. You can see account descriptions, their account type, and the corresponding statement type. Other expenses that do not fit neatly into these categories are also tracked under expense accounts. Revenue is the money your business brings in through sales or investments.
Always customize the COA based on the client’s industry, business model, and regulatory requirements to ensure accurate reporting. Stick to a clear, predictable naming structure so anyone reviewing the books can easily understand the accounts. Finally, revisit the COA periodically, especially as the business grows or changes. Once the COA is drafted, review it carefully to ensure everything is properly categorized, there are no duplicate accounts, and the numbering sequence makes sense. No two businesses are exactly alike, so it’s important to customize the COA to fit the specific business or client. Sub-accounts allow for deeper reporting without cluttering the main chart.
The complete Swedish BAS standard chart of about 1250 accounts is also available in English and German texts in a printed publication from the non-profit branch BAS organisation. The charts of accounts can be picked from a standard chart of accounts, like the BAS in Sweden. In some countries, charts of accounts are defined by the accountant from a standard general layouts or as regulated by law.
These include liquid assets like cash, inventory, and equipment, plus prepaid expenses like paid-in-full leases or money that is under contract to come in. Last but not least, your expense accounts are where you record your business’s expenses. Expenses are the costs you incur during operations, like advertising and payroll costs.
It facilitates meticulous tracking of every financial transaction, segregating expenses, liabilities, and revenues. A Chart of Accounts is a list of financial accounts a business uses. Each account has a unique numerical code for efficient data entry and retrieval.
Some other options you have when defining how your chart of accounts looks is to include account types, or other information, such as which financial statement they can be found on. The Chart of Accounts is more than just a list of numbers and names; it’s the foundation of your financial reporting system. Investing the time to set it up properly—and maintaining it as your business grows—pays off in better decision-making, streamlined audits, and improved financial health.
It includes assets, liabilities, and owners’ equity, making it a valuable tool for understanding a company’s resources and financings. Assets represent what a company owns, liabilities represent what a company owes, and owners’ equity represents the shareholders’ investment. The chart of accounts is the underlying structure for organizing financial information and reporting. Businesses utilize the chart of accounts for various financial management tasks. This information is essential for setting realistic financial goals.
Periodic review and updating ensure it accurately reflects current operations and reporting needs. A well-structured Chart of Accounts supports financial management beyond record-keeping. It provides data for accurate financial reports, such as the Income Statement and Balance Sheet. These reports show financial performance and position, aiding internal assessment and external compliance. As part of the equity accounts, retained earnings serve as an indicator of the company’s financial health and its capacity to generate profits for continued growth. By closely monitoring retained earnings alongside shareholders’ equity, businesses can make informed financial decisions that enhance shareholder value and long-term sustainability.
This classic go-to software for FP&A and strategic finance professionals is still widely used today. While most finance pros prefer Excel, Google Sheets makes numbers more accessible, easier to understand, and transparent. NetSuite also integrates with Cube, so you can keep your accounting and FP&A separate. Like QuickBooks, Sage Intacct is an ERP trusted by all kinds of businesses.
Examples of long-term liability subcategories are long-term loans, mortgage payments, bonds, employee pensions, and deferred tax liabilities. A well-structured COA means that accountants can find everything they need in a single, centralized space. They can quickly complete key tasks, such as filing tax returns while boosting efficiency to propel business growth. Once established, don’t constantly add new accounts—group logically and stick to the structure. Set a schedule to review the COA at least once a year, or anytime the business undergoes major changes.
