The Meaning of a COA (Chart of Accounts)
A chart of accounts is a method employed by businesses to systematize their books of accounts.
It demonstrates the financial records required for business operations and financial reporting. All the business’s financial accounts that will be included in the general ledger are shown there.
Each account in a company’s books can be found in a chart of accounts, and it will be labeled as “assets,” “liabilities,” “equity,” “revenues,” or “expenses.”
The “balance sheet” and the “income statement,” sometimes known as the “profit report,” make up what is known as the “financial statement.”
The chart of accounts enables more streamlined reporting by clearly identifying each account.
Why Is a Chart of Accounts Necessary?
Your company’s financial records will be easier to manage if a chart of accounts is used. Users of financial statements are able to have a more nuanced understanding of the company’s financial standing as a result.
How to Create an Account Balance Sheet
To create a chart of accounts, first make a list of the standard accounts that are relevant to your company. The following are examples of such narratives:
Usually, there will be four columns in a chart of accounts: account, category, sub-account, and account number.
Categories are marked as either belonging to the Balance Sheet or the Income Statement in the account column.
The classification of a sub-account as an asset, liability, equity, revenue, or expense is referred to as its “category.”
Journal entries will be made using these designated cash, receivable, payable, retained earnings, utility expense, and revenue accounts.
Number of Account
A separate account number for each one is needed for billing purposes.
When using a computerized accounting system, the account numbers are generated mechanically. When dealing with manual systems, a company must devise its own numbering system.
Accounting System Flowchart Sample
A sample chart of accounts is shown below.
What Role Does a Chart of Accounts Play?
A chart of accounts is useful because it provides structure for recording financial transactions. The precise categorization of all transactions is crucial for a company since it serves as the foundation for all reporting.
Accurate reporting and no data entry mistakes are made possible by using a chart of accounts. Because only authorized personnel are able to read the reports, and because they only see the information pertinent to their department, it also aids in protecting financial privacy.
However, as a company expands, its chart of accounts will inevitably need to be revised as old accounts become obsolete and new ones are established.
If your company is branching out into new product categories, you’ll need dedicated accounts for each.
A company’s financial statements, transactions, and accounting codes can be found in the chart of accounts. It organizes them in a way that makes them convenient to access and use in report creation.
An effective chart of accounts is one that is routinely examined and updated to reflect the current financial situation of the company.
It also needs to be correctly set up according to the chart of accounts layout that is most convenient for the user.
If assigning account numbers manually, a business must devise its own system for keeping track of accounts.
If a computer is used instead, a more conventional numbering system can be implemented.
These make it simpler to compile financial accounts and reports, which in turn aids organizations in making growth-promoting judgments.