Chart of Accounts: The Ultimate Guide with examples

In setting up a COA, it’s important to have a systematic structure that is easily understandable and scalable as the company grows. Revenue is the amount of money your business brings in by selling its products or services to clients. These articles and related content is the property of The Sage Group plc or its contractors or its licensors (“Sage”). Please do not copy, reproduce, modify, distribute or disburse without express consent from Sage.These articles and related content is provided as a general guidance for informational purposes only.

Categories on the Chart of Accounts

However, it can be reduced to four in small organizations, while in large corporations, it can also be more than five. It contains both balance sheet information and income statement information. Revenue accounts display the earnings/incomes the company accrues during a specific period. Some organizations may also structure their COAs such that various expenses are separately listed by department, with each department having its own set of expense accounts. An account in this case refers to a unique record for each type of the company’s revenue, expense, equity, assets, and liability. The term “chart of accounts” (COA) refers to a list that contains all the accounts that a company uses to record transactions in its general ledger.

Accounts in a standard chart of accounts are organized according to a numerical system. Since non-operating revenues source are typically not predictable or recurring, they are termed one-time events or gains. Non-operating expenses are the expenses which do not involve the business’s main activities. Accounting standards dictate that a company should only record contingent liabilities if the liability is probable and if it’s possible to reasonably estimate the amount. Examples of contingent liabilities include lawsuits and product warranties.

Setting Up COA in Software

• However, to use these features, accounts must link seamlessly with software.
• It is expected that a company will expand and/or modify these sample charts of accounts so that the specific needs of the company are met.
• A chart of accounts is organized using a hierarchical structure, starting with broad categories and then breaking them down into more specific subcategories.
• For instance, accounts in the categories of “operating revenues” and “operating expenses” can be further organized according to business function as well as company divisions.

GAAP guidelines help ensure the uniformity and comparability of financial reporting, making it critical for accounting and auditing professionals to abide by these established principles. The Spanish generally accepted accounting principles chart of accounts layout is used in Spain. The French generally accepted accounting principles chart of accounts layout is used in France, Belgium, Spain and many francophone countries. The use of the French GAAP chart of accounts layout (but not the detailed accounts) is stated in French law. Accounts may be added to the chart of accounts as needed; they would not generally be removed, especially if any transaction had been posted to the account or if there is a non-zero balance. A chart of accounts is usually created for an organization by an accountant and available for use by the bookkeeper.

More importantly, think about the types of transactions that you handle regularly. This article explores the a chart of accounts usually starts with concept of a chart of accounts, why this is important, and how it works. We also provide a step-by-step guide on how to create and record a chart of accounts.

For example, suppose last year your company bought a new computer system for $1,100. Since the cost of the system was more than $500, the purchase was entered to an asset account rather than to an expense account. Consult your accountant or tax preparer to determine the actual minimum cost you should use to determine fixed assets.

Financial Statement

Assume Big Bill’s Construction Co. purchased a work truck for $10,000 in 2005. He sells his old truck and gets a $1,500 and purchases a new truck for $25,000. Bookkeepers and accountants use the chart of accounts to organize and keep track of the accounts and account numbers in the accounting system. The subcategory account is usually represented by the second digit within the account code. For instance, let’s assume that the account code for a specific account is 109. Equity capital is the risk capital staked by investors through purchasing a company’s common stock (ordinary shares).

• A service-based business might require additional entries in the COA to distinguish between the various services provided.
• An expense may be defined as the amount by which an asset reduces in value when it is used to generate revenue for a business.
• The former often define a chart of accounts while the latter does not.
• The asset-liability and equity accounts affect the balance sheet, whereas the income and expense accounts reflect changes in the income statement.

How can a chart of accounts be customized for different businesses?

To create a comprehensive and effective chart of accounts, it’s vital to understand its structure and the different types of accounts it includes. Breaking down the COA into categories such as assets, liabilities, equity, revenue, and expenses allows for easy organization and analysis of a company’s financial health. Additionally, integrating a COA into accounting software can further streamline financial management and reporting.

Actual accounts and numbers can vary depending on each business’s specific needs and structure. Larger businesses may have more detailed accounts, including more specific sub-categories. The COA should be tailored to fit the unique accounting needs of each business, capturing all relevant financial activities.

As a result the bad debts expense is more closely matched to the sale. When a specific account is identified as uncollectible, the Allowance for Doubtful Accounts should be debited and Accounts Receivable should be credited. The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. The amount in this entry may be a percentage of sales or it might be based on an aging analysis of the accounts receivables (also referred to as a percentage of receivables).

For example, companies in the United States must have certain accounts in place to comply with the tax reporting requirements of the IRS (Internal Revenue Service). One of the IRS stipulations is that expenses like travel and entertainment should be tracked in individual accounts. While in most jurisdictions and industries it is entirely up to each entity to design the chart of accounts according to its specific requirements, others provide general guidelines or are even regulated by law.

The basic equation for determining equity is a company’s assets minus its liabilities. A business transaction will fall into one of these categories, providing an easily understood breakdown of all financial transactions conducted during a specific accounting period. However, to use these features, accounts must link seamlessly with software. Make sure that your chart of accounts can integrate with your business tools.