What Is a Chart of Accounts?
A chart of accounts (COA) is an index of all the accounts in the general ledger (GL) of a business.
A COA is arranged by grouping together accounts into these major categories: assets, liabilities, equity, revenue, and expenses. The accounts are numbered in a consistent way so that, for example, all expense accounts are assigned a 500 number.
The COA gives an overview of the financial information a business is collecting in its accounts. So a good COA can help ensure the right data is being gathered. Read on to discover how a COA works and how a COA can improve the control and management of your business.
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Chart of Accounts Definition
A chart of accounts (COA) provides a comprehensive listing of every account in the general ledger, broken down into subcategories. As such, it is an organizational tool that makes it easier to locate specific accounts. In that sense, a COA is simply a table of contents for the general ledger.
The basic elements of a COA are the account names, account description, and account number. The account numbers do not run consecutively, which allows new numbers to be inserted in the gaps.
The account names in the COA are usually arranged in the order the accounts appear in the financial statements. That means that balance sheet accounts, such as assets, liabilities, and shareholders' equity, are listed first, followed by accounts in the income statement (i.e., revenues and expenses).
Chart of Accounts Example
Chart of Accounts (COA) for Small Business
| Account Number | Account Name | Description |
|---|---|---|
| 111 | Cash | Asset |
| 112 | Accounts Receivable | Asset |
| 115 | Office Supplies | Asset |
| 140 | Land | Asset |
| 141 | Buildings | Asset |
| 142 | Buildings - Acc. Depreciation | Asset |
| ... | ||
| 215 | Accounts Payable | Liability |
| 220 | Wages Payable | Liability |
| 225 | Income Taxes Payable | Liability |
| ... | ||
| 310 | Common Stock | Equity |
| 315 | Preferred Stock | Equity |
| 320 | Retained Earnings | Equity |
| ... | ||
| 410 | Sales | Revenue |
| 415 | Services | Revenue |
| 420 | Other Income | Revenue |
| ... | ||
| 510 | Wages | Expense |
| 515 | Utilities | Expense |
| 550 | Depreciation | Expense |
Chart of Accounts List
One use of the Chart of Accounts (COA) is as a summary. In this case, its purpose is to provide an overview of the groups of data or accounts that store information of the same type. In the simple example above, the features of a COA are noticeable. The accounts are numbered so that a consecutive series of numbers are devoted to accounts of a certain type. Asset accounts are 100s, liability accounts are 200s, and so on. The numbering allows additional accounts to be inserted in between. So a new liability account would have a number in the 200s.
Accumulated depreciation is listed as an asset account. That’s because accumulated depreciation accounts are associated with (fixed) assets. Accumulated depreciation accounts are contra accounts that reduce the value of the associated 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 net value of buildings on the balance sheet would be $200,000.
Why Is the Chart of Accounts Important?
The Chart of Accounts organizes the General Ledger accounts in a logical way that provides easy reference. But since the accounts collect information on one type of transaction, the COA can become a tool of analysis. The GL and, by extension, the COA should really show the financial transactions the business wants to monitor and measure. Consequently, the COA should have a logical link to the Key Performance Indicators (KPIs) of the business.
Ledger accounts can be subdivided to produce more detailed information. For example, instead of one sales account, the ledger might have a number of sales accounts, with sales from different regions—North, East, Midwest, South, and West—going into dedicated accounts. This crucial data would be collected in real time, as postings to the accounts are made, so that information that may have taken hours to produce is available in an instant.
GL data was originally designed to produce financial reports according to certain guidelines, such as generally accepted accounting principles (GAAP). (Public companies are required to comply with GAAP. Private companies need not, though many of them do.) This is to ensure that there is a unified way for external users, such as investors and tax authorities, to assess a company’s financial performance and position.
But advances in information technology have opened up the possibilities for greater use by internal users, such as managers, by making a more detailed division of transactions and improved data analysis possible. The costs of such detailed analysis in a manual system would have outweighed the benefits.
Chart of Accounts Glossary
Account
An account in bookkeeping is a record of financial transactions of a certain type (e.g., credit sales to the ABC Corp).
Major Account Types
There are five major account types: assets, liabilities, equity, revenue, and expenses.
Asset
An asset is anything of value a business controls or owns. It could be tangible property, such as buildings or inventory, or intangibles, such as copyright and goodwill.
Equity
Equity is the owner’s stake in a business. It is the residual interest in the assets that remain after deducting liabilities.
Expense
Expenses are the “price” of doing business. They are the costs a business must incur in order to gain revenue.
Liability
A liability is a debt or obligation owed by a business to some individual or entity (the creditor), which is to be paid in cash, goods, or services.
Revenue
Revenues are the economic benefits a business gains by selling its goods and services. In accounting terms, it is the “top line” (that is, the first line on the income statement).
