Definition
A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger. A company has the flexibility to tailor its chart of accounts to best suit its needs, including adding accounts as needed. Each company’s Chart of Accounts would vary as they will break it down as per their business needs. This COA will give your investors and shareholders a clear picture about your firm’s financial health. Separating expenditures, revenue, assets, and liabilities will help achieve this and ensure that financial statements comply with the reporting standards.
Format
The list of each account a company owns is typically shown in the order the accounts appear in its financial statements. That means that balance sheet accounts, assets, liabilities and shareholders' equity, are listed first, followed by accounts in the income statement - revenues and expenses.
For a small corporation, COAs might include these sub-accounts under the assets account:
- Cash
- Savings account
- Petty cash balance
- Accounts receivable
- Undeposited funds
- Inventory assets
- Prepaid insurance
- Vehicles
- Buildings
Liabilities account may have sub-accounts, such as:
- The company credit card
- Accrued liablities
- Accounts payable
- Payroll liabilities
- Notes payable
Shareholders' equity can be broken down into the following accounts:
- Common stock
- Preferred stock
- Retained earnings
How to create Chart of Accounts?
There are a few things that you should consider when making a chart of accounts for your business.
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Numbering
Refrain from using concurrent numbers for your accounts. Since, you will probably need to add accounts in the future, organising the new accounts in the right order might get a little confusing. For example, assume your cash account is 1-001 and your accounts receivable account is 1-002, now you want to add a petty cash account. Well, this should be listed between the cash and accounts receivable in the chart, but there isn’t a number in between them. So, it is always advised that you choose a series which will have gaps for additional accounts.
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Size
Set up your chart to have enough accounts to record transactions properly, but don’t go overboard. The more accounts you have, the more difficult it will be to consolidate them into financial statements and reports. Also, it’s important to periodically look through the chart and consolidate duplicate accounts.
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Changes
It’s inevitable that you will need to add accounts to your chart in the future, but don’t drastically change the numbering structure and total number of accounts in the future. A big change will make it difficult to compare accounting record between these years.
