What is a chart of accounts?
The chart of accounts (CoA) is a list of all the accounts used in your business. It is the foundation of your business’s financial statements. Think of it like: if your business is a filing cabinet, the chart of accounts would be a drawer and the separate accounts would be folders to better organize your files (or transactions).
Creating a clean CoA structure makes it easier to classify transactions, keep your business’s information organized, and understand financial statements. Being able to understand and analyze your financial statements allows you to make better/strategic decisions for your business.
While there is a “right way” to structure a CoA, the “best way” depends on how your business operates and what information is most important to you. Your financial statements tell the story of your business. In order for them to be helpful, they need to be accurate.
What does it include? / Setting up your CoA
There are five universal categories of accounts that flow to either the balance sheet or income statement: assets, liabilities, equity, revenue, and expenses. These categories include the following accounts:
- Assets: cash, accounts receivable, buildings, equipment, inventory, etc.
- Liabilities: loans, accounts payable, etc.
- Equity: common stock, retained earnings, etc.
- Revenue: income accounts that reflect money earned from the business’s activities; sales of product income, service income, etc.
- Expenses: business costs, such as: cost of goods sold, advertising, rent, utilities, wages, etc.
You can include additional industry-specific accounts and subaccounts within these accounts to better organize your various transactions. The amount of detail in your financial statements depends on the detail and structure of your chart of accounts. In most cases, we suggest keeping your chart of accounts simple until it is absolutely necessary to further complicate it. The goal is to keep your chart of accounts clutter-free.
For those just starting out, setting up your chart of accounts, as well as accurately mapping products and services to the right accounts is crucial for your success. A clean and accurate chart of accounts makes classifying transactions and understanding your financial statements a breeze. (eliminates opportunities for misclassification by a client or our team)
Best Practice for Setting up your CoA
A best practice for setting up your CoA is to implement a Numbering System for the 5 Universal Accounts. This allows you to easily locate an account based on what category it falls into.
The usual numbering system is as follows:
- 1000-1900 Assets
- 2000-2900 Liabilities
- 3000-3900 Equity
- 4000-4900 Revenue
- 5000-5900 Expenses
How to clean up your chart of accounts
For those who find their chart of accounts has become too complicated and messy, a review of your CoA may be in order. Here are a few ways you can clean up your CoA:
- Make Accounts Inactive
- Merge Duplicate Accounts
- Remap Products and Services to Correct Account
- Mapping products and services to the correct accounts ensures an accurate representation of your business on your financial statements.
- It is best to verify correct mapping from time to time and when new products and services are added.
What’s next?
We hope you found this information helpful. If you still have questions about the structure of a chart of accounts or need help cleaning up your CoA, please reach out.
Download our healthy chart of accounts template.