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A chart of accounts is used to organize a company’s finances. A COA can also be helpful in giving shareholders or potential investors a clear picture of a company’s financial health.
What is a Chart of Accounts (COA)?
A chart of accounts (COA) is an index of all the different accounts within a company’s ledger. Simply put an account is a 'bucket' of value–or the balances a company needs to track. Most businesses have important balances they want to track such as revenue, money spent on wages, or what amounts are owed to suppliers. Each of these balances has their own account.
The COA is essentially a chart that maps a company’s account types by category. It also dictates how the transactions should be entered in the ledger.
How does a COA work?
A COA typically includes a name, a short description, and an identification code for each of the different accounts. A company’s transactions are then recorded throughout the year by debiting and crediting against these accounts.
Let’s look at a sample COA for a bakery, Pies-A-Plenty:
| Reference Number | Account Description | Account Type |
|---|---|---|
1010 | Cash | Assets |
1020 | Commercial Baking Equipment | Assets |
2010 | Accounts Payable | Liabilities |
3010 | Pies-A-Plenty Owners Equity | Equity |
4010 | Pie Sales | Revenues |
5010 | Bakery Rent | Expenses |
5020 | Bakery Employee Wages | Expenses |
Typically, a COA contains these different accounts types:
- Asset accounts: This includes things like fixed assets, prepaid expenses, accounts receivable, cash, etc.
- Liability accounts: This includes things like notes payable, lines of credit, accounts payable, debt, etc.
- Equity accounts: This includes things like owner’s capital, distributions, stock, dividends, retained earnings, etc.
- Revenue accounts: This includes things like sales, services fees, etc.
- Expense accounts: This includes things like wages and salaries, rent, utilities, etc.
- Gain and loss accounts: This includes things like interest, investment, disposal of an asset, etc.
For each of these accounts, the company’s ledger shows the account balance at the beginning of a given period, all credits and debits from the account during that period, and the ending balance at the end of that period.
While COAs can be tailored to a specific company’s needs and operations, they must still follow the guidelines of the Financial Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP).
To learn more about the Chart of Accounts and related topics, take a look at these articles:
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