- Chart of accounts
Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management · Chart of accounts · Journal · Special journals · Constant Item Purchasing Power Accounting · Cost of goods sold · Credit terms · Debits and credits · Double-entry system · Mark-to-market accounting · FIFO & LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance Fields of accounting Cost · Financial · Forensic · Fund · Management · Tax Financial statements Statement of financial position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL Auditing Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act Accounting qualifications CA · CPA · CCA · CGA · CMA · CAT · CFA · CIIA · ACCA · CIA · CTP · ICAEW · CIMA · IPA · ICAN
A chart of accounts (COA) is a created list of the accounts used by a business entity to define each class of items for which money or the equivalent is spent or received. It is used to organize the finances of the entity and to segregate expenditures, revenue, assets and liabilities in order to give interested parties a better understanding of the financial health of the entity.
The list can be numerical, alphabetic, or alpha-numeric. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique to allow its ledger to be located. The list is typically arranged in the order of the customary appearance of accounts in the financial statements, profit and loss accounts followed by balance sheet accounts.
Nomenclature, classification and codification
Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified. (Software for some small businesses may not require account numbers.) Account numbers are often five or more digits in length with each digit representing a division of the company, the department, the type of account, etc.
As you will see, the first digit might signify if the account is an asset, liability, etc. For example, if the first digit is a "1" it is an asset. If the first digit is a "5" it is an operating expense.
A gap between account numbers allows for adding accounts in the future. The following is a partial listing of a sample chart of accounts.
Simple Chart of Accounts
Group headings - Sales, Cost of Goods Sold, Direct Expenses, Administration Expenses, Selling Expenses, Distribution Expenses, Establishment Expenses, Financial Expenses
Within each of these headings will be the individual nominal ledger accounts that make up the chart of accounts. Establishment expenses may consist of rent, rates, repairs
Balance Sheet Accounts
Asset Accounts ----
Cash, Bank Accounts, Accounts Receivable (Debtors), Prepaid Expenses, Inventory (Stock on Hand), Land, Buildings, Vehicles & Equipment, Investments & Stocks, Accumulated Depreciation and Other Assets
Liability Accounts ----
Accounts Payable (Creditors), Credit Cards, Tax Payable, Employment Expenses Payable, Bank Loans,
Stockholders' Equity Accounts ----
Common Stock (Share Capital), Retained Earnings (Revenue Reserves), Drawings
Profit & Loss accounts
Revenue Accounts ----
Sales Revenue, Sales Returns & Allowances, Sales Discounts, Interest Income,
Cost of Goods Sold Accounts----
Purchases and sales Expense All sales Expense Purchase Returns & Allowances
Expense Accounts ----
Advertising Expense, Bank Fees, Depreciation Expense, Payroll Expense, Payroll Tax Expense, Rent Expense, Income Tax Expense, Office Expense, Utilities Expense
The trial balance is a list of the active general ledger accounts with debit and credit balances. A balanced trial balance does not guarantee that there are no errors in the nominal ledger entries.
Types of accounts
- Asset accounts: represent the different types of economic resources owned by a business, common examples of Asset accounts are cash, cash in bank, building, inventory, prepaid rent, goodwill, accounts receivable
- Liability accounts: represent the different types of economic obligations by a business, such as accounts payable, bank loan, bonds payable, accrued interest.
- Equity accounts: represent the residual equity of a business (after deducting from Assets all the liabilities) including Retained Earnings and Appropriations.
- Revenue accounts or income: represent the company's gross earnings and common examples include Sales, Service revenue and Interest Income.
- Expense accounts: represent the company's expenditures to enable itself to operate. Common examples are electricity and water, rentals, depreciation, doubtful accounts, interest, insurance.
- Contra-accounts: Some balance sheet items have corresponding contra accounts, with negative balances, that offset them. Examples are accumulated depreciation against equipment, and allowance for bad debts against long-term notes receivable.
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