Chart of Accounts

The chart of accounts (CoA) lists all the accounts for a business and arranges them according to five basic categories of organization, typically:

• Assets

• Liabilities

• Equity

• Income or revenue

• Expenses

The CoA is a master document used to produce other accounting records and financial statements like the balance sheet, income statements, and cash flow statements.

It is one of four major components of the general ledger (GL)—an accounting record that compiles all financial transactions for the business. The other three components are financial transactions, account balances, and accounting periods.

The GL allows accountants and business managers to make informed analyses about the business by looking at its transactions and how they impact its finances. To facilitate this analysis, the general ledger displays transactions in groupings, or accounts, which represent certain functional aspects of the business.

The audience interested in the chart of accounts might include investors, shareholders, auditors, management, and accountants.

Within the five broad categories, the chart of accounts contains separate sets of accounts for the purposes of recording and organizing specific transactions.

These are referred to as subledgers or subledger accounts.

1. Assets may include a cash account, accounts receivable, inventory, investments, short-term assets, and fixed assets

2. Liabilities might include mortgage debt, bank debt, accounts payable, unpaid wages or taxes, and unearned rent

3. Equity refers to various forms of value gained from stock in the company, such as common stock, preferred stock, retained earnings, and contributed surplus

4. Revenue accounts include all manner of income for the business; this might include sales, rental income, interest income, and asset sales

5. Expense accounts can include a variety of expenses or costs incurred by the business for its operations including the cost of goods sold, cost of sales, repairs, maintenance, rent, wages, utilities, bank charges, and fees

The various subledger accounts within each of the five categories in the chart of accounts will vary depending on the business. For example, an ice cream shop will have accounts for expenses such as utilities, rent, and supplies. A property management company will have revenue accounts for rental and investment income. A manufacturer will have asset accounts for inventory and expense accounts for the cost of goods sold.

The chart of accounts is arranged in columns, and the number of columns may vary. Most charts of accounts will have at least four columns with the following headings:

1. Account Number

2. Account Name

3. Account Type

4. Account Description

Some charts of accounts may also have a fifth column that displays the type of financial statement where the account transactions will appear. For example, asset account transactions like cash and accounts receivable will appear on the company’s balance sheet. Revenue account transactions like sales and rent, and expenses like fees and wages, will appear on the income statement.

Account Number

A company could assign account numbers to control the order of accounts in financial statements to make them simpler to decipher and more actionable.

Account Name

Account names reflect each of the business accounts you’re reporting on (such as bank fees, cash, taxes, etc.).

Account Type

Each account is assigned a type that identifies how a transaction should be coded and indicates where it should appear in the financial statement.

Account Detail or Description

This is a further drill down from Account Type and provides a detailed view of the entry across a broader category. For example, it could identify the exact type of Fixed Asset being referenced.

The numbering system in the chart of accounts typically follows a general format, which corresponds to the structure of the five basic categories.

Sub-accounts in each category are assigned a sequential number within that category’s series of numbers, for example:

• Assets 100-199

• Liabilities 200-299

• Equity accounts 300-399

• Revenues 400-499

• Expenses 500-599

For larger companies, additional codes representing divisions and/or departments are added in front of the account codes. In these instances, the number will be a five or seven-digit serial number, with the three-digit account number at the end.

For example, expenses in a large corporation with multiple divisions and departments might look something like 03-07-534. The first two digits, 03, represent a particular division. The second two digits, 07, represent a department. The last three digits, 534 represent a particular sub-account of expenses, such as utilities or rent.

Since the chart of accounts is an important tool to manage a company’s financials and can be valuable in making smart business decisions, there are many best practices that can help keep the CoA in good shape.

• Don’t delete old accounts—at least not until the end of the year. Even then, you may wish to mark them inactive, so you can maintain historical records for comparison.

• Do review your accounts at the end of the year to find opportunities for consolidation and ensure the accounts you have are correct and relevant.

• Don’t add too many accounts. For example, you don’t want to have one account with only one transaction posted to it, and you don’t need a separate account for every product or service you sell or every bill you pay.

• Do space out account numbers if/when you add new ones—this allows you to leave room for growth.

• Do aim for consistency by creating a CoA that doesn’t change much year over year. This will help you compare accounts over time.