If you’re a business owner – or about to set up a company of your own – you might be wondering what a Chart of Accounts is, and why you need one.
This guide has you covered. We’ll highlight the importance of having a comprehensive and usable Chart of Accounts for your company, as well as talking through how the document works and what information it should contain.
No matter what type of business you own, a Chart of Accounts is a simple but essential resource to make it easier to manage your finances. Whether you’re a startup founder preparing paperwork to present to investors, or an established business owner looking to give your profits a boost, here’s how a Chart of Accounts may help.
What is a Chart of Accounts (COA)?
Let’s start with the basics. A Chart of Accounts – which is often shortened to COA – is a reference tool for business owners, indexing and splitting down all types of financial information for your company by category and subcategory.
By splitting out different types of payment and spending to assign categories and subcategories, you can more easily breakdown the large volume of financial information contained in business financial statements. This allows entrepreneurs to slice their data in different ways, to gain new insights into the financial performance of their business. It can also be a powerful tool to show potential investors – and provide a guide as to where to record business transactions like sales, expenses and costs in future.
Your COA is a live document which will develop over time. Keeping tight records over the years will mean you can compare and contrast the financial performance of your company on different types of income and outgoing more easily.
How does it work?
A Chart of Accounts indexes all the financial accounts of a company, using a name, description and reference number to allow the user to easily find and examine the information they’re looking for. Reference numbers are typically applied in sequence, with the COA following the same order as a standard financial statement. This means accounts will be listed as follows:
- Accounts from the balance sheet – including assets and liabilities
- Shareholder equity
- Accounts from the income statement – covering revenue and expenses
One easy place to see a COA at work is in company expense accounting. If you work for a business and have made a purchase – let’s say for some essential office supplies – you may need to code the expense so it appears in the correct place in the company accounts. For example, your team may have an expense code to show what you’re spending versus another team. Or you may have a specific code for office supplies, which allows the overall spend in this category to be easily split out.
Charts of Accounts can be created independently – but you’ll probably find your preferred accounting software can do much of the hard work for you. This has advantages, such as ensuring sensible coding is selected for different categories, and of course, taking up less of your precious time.
Business owners can tailor much about their Chart of Accounts to reflect the specifics of their company. This gives a degree of freedom in the final COA – but there are certain protocols which are followed when preparing this financial document to ensure standards are adhered to. If you’re thinking of creating a COA for your business, you’ll also need to stick to standard accounting procedures, and reflect the guidelines of the Financial Accounting Standards Board. Get professional support and advice before getting started, if you feel you need it.
Types of Chart of Accounts
A company COA will feature a range of different accounts which are given individual codes and names. Here are the big categories you’ll usually find in any Chart of Accounts document.
The balance sheet accounts
The balance sheet is one of the key financial statements for any business. Balance sheet accounts are usually listed first in a COA, which means the codes used typically start with ‘1’. You’ll see the following types of accounts listed:
Asset accounts – these can split out different types of asset including both tangible and intangible assets. This can cover everything from technology you’ve patented, to cash and equipment, vehicles, inventory owned or real estate.
Liability accounts – anything your company owes is captured in these accounts, and coded for easy reference and comparison. This will include subcategories like wages, company credit cards and supplier invoices which are yet to be paid.
Equity accounts – equity accounts are used to show the value of the business to your shareholders, once known expenses have been deducted. Equity can be further broken down into stock types if relevant.
The income statement accounts
The other main information in your COA will come from the company income statement. This is another key business document, which can be categorized using the Chart of Accounts for ease and to allow data driven decisions about income, outgoings and cashflow.
Revenue/income accounts – statements here will cover any income from sales, or other revenue streams like rent. You can categorize income in different ways to show where exactly it’s coming from – for example, getting different teams to assign their sales different COA codes.
Expense accounts – all outgoings can be captured here, such as wages, rent, petty cash expenses, and the overheads of running an office or store. By splitting different costs out under different subcategories you’ll be able to see easily if your costs of rent and utilities have risen from last year, or if the wages for one team greatly outweigh another, for example.
The importance of Chart of Accounts
Your COA has several important functions.
Firstly there are some more short-term, tactical reasons to have a great Chart of Accounts. As a comprehensive index of all the different accounts used in your business, it’s a guide to help people when recording financial transactions, and can cut errors. That saves time – and therefore money.
It can also function as a reference tool for your accounting team, as well as helping managers to get a simple view of how their part of the business is performing at any given time. They’ll be able to look up their team’s sales using the appropriate code in the COA, or check the expenses are under control, without needing to memorize code numbers or search for the information they need.
A Chart of Accounts also has a more strategic role to play. By using categories and subcategories, the COA has easily searchable information which can build up over years. This allows for deep analysis and detailed financial reviews, showing how the business is doing – and where it may be able to improve.
A Chart of Accounts is an important tool in managing your business finances. It can help avoid human errors in recording transactions, and makes it easier for a team to know how to keep on top of the financial reporting in their part of the business.
By coding and referencing all the different statements used to monitor and measure your company’s financial performance, a COA allows for both quick searches and detailed analysis. That can help you to see where your business is at today – and what you might need to do to build your profits for the future.