Chart of Accounts (COA) Definition

A chart of accounts is a system used by an organization to organize its accounting entries. It shows the accounts that are needed for running a business and to prepare financial statements. It reflects all the financial accounts that will be used in the general ledger of a business. A chart of accounts categorizes each account into either “assets,” “liabilities,” “equity,” “revenues,” or “expenses.” These classifications form what is called the ‘financial statement’ which comprises the “balance sheet” and the “income statement” which is also called the “profit report.” The chart of accounts makes it easy to identify each account, allowing for more organized reporting.

What Is the Use of a Chart of Accounts?

Using a chart of accounts will help your organization keep its financial records organized. It allows users of financial statements to come up with a clear insight as to the company’s financial health.

How to Set up a Chart of Accounts

In order to set up a chart of accounts, begin by listing down the typical accounts that apply to your business. Some of these accounts would include: chart of accounts The chart of accounts typically has four columns: account, category, sub-account, and account number.

Account

The account column refers to whether a category belongs to a Balance Sheet or to an Income Statement.

Category

Category refers to whether a sub-account is an asset, liability, equity, revenue, or expense.

Sub-Account

This refers to the specific accounts to be used in making journal entries such as cash, accounts receivable, accounts payable, retained earnings, utilities expense, and revenue.

Account Number

Each account is to be assigned a unique account number to be used for coding charges. In a computerized system of accounting, the system automatically generates the account numbers. For manual ones, a business has to set up its own numbering system.

Example of a Chart of Accounts

Below is an example of a chart of accounts: Chart of Accounts  

Why Is a Chart of Accounts Important?

The importance of a chart of accounts lies in its ability to organize financial records. For an organization, it is important that all transactions are categorized correctly because they will be used as the basis for generating reports about the business. A chart of accounts allows for more accurate reporting and prevents data entry errors. It also helps with maintaining financial privacy since only authorized personnel can view the reports and they only see the information relevant to their department. However, it is important that a business regularly review and revise its chart of accounts because as growth occurs, some accounts become irrelevant or others need to be added. For example, if an organization expands into different product lines, it needs to have a separate account for each line of products.

Final Thoughts

A chart of accounts is a list used for organizing financial statements, transactions, and codes of a business. It categorizes them so they are easy to find and use when generating reports. In order to have a useful chart of accounts, it needs to be regularly reviewed and revised so that it is relevant to the current state of the business. Also, it needs to be set up properly according to one’s preferred chart of accounts structure. If manually done, an organization should come up with its own numbering system for each account’s corresponding account number. Otherwise, a more established numbering system can be adopted if handled by a computer. With these, financial statements and reports become easier to generate, thus helping businesses make better decisions for their growth.

A chart of accounts is a system used by an organization to organize its accounting entries. It shows the accounts that are needed for running a business and to prepare financial statements. It reflects all the financial accounts that will be used in the general ledger of a business.
In order to set up a chart of accounts, begin by listing down the typical accounts that apply to your business such as cash, accounts payable, wages expense, etc. Afterward, organize these accounts into their proper account (whether it falls as a balance sheet account or income statement account) and category (whether an asset, liability, equity, revenue, or expense). Then, have a unique account number assigned to each sub-account.
The chart of accounts typically has four columns: account, category, sub-account, and account number. Account is either a balance sheet or income statement account. Category refers to whether an account is classified as an asset, liability, equity, revenue, or expense. Sub-accounts refer to the specific account names that are to be used in making the journal entries such as cash, accounts receivable, notes payable, revenue, and utilities expense. Account number is the unique number assigned to each sub-account that is important in coding charges.
Using a chart of accounts will help your organization keep its financial records organized. It allows users of financial statements to come up with a clear insight as to the company's financial health.
The importance of a chart of accounts lies in its ability to organize financial records. For an organization, it is important that all transactions are categorized correctly because they will be used as the basis for generating reports about the business. A chart of accounts allows for more accurate reporting and prevents data entry errors.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.