What is a Chart of Accounts? A How-To with Examples Bench Accounting

A well-designed chart of accounts should separate out all the company’s most important accounts, and make it easy to figure out which transactions get recorded in which account. Assets are resources your business owns that can be converted into cash and therefore have a monetary value. Examples of assets include your accounts receivable, loan receivables and physical assets like vehicles, property, and equipment. A business transaction will fall into one of these categories, providing an easily understood breakdown of all financial transactions conducted during a specific accounting period.

Asset accounts

The COA also includes accounts for online payment systems to monitor digital transactions. The first three are assets, liabilities, and equity, which flow into the balance sheet. The remaining two are income or revenue and expenses, which flow into the income statement. Some businesses also include capital and financial statement categories.

1. To wrap it up, the COA is crucial for businesses to handle their money matters.
2. Accounting software can facilitate standardization, providing pre-defined templates that align with generally accepted accounting principles (GAAP).
3. Similarly, if you pay rent for a building or piece of equipment, you might set up a ‘rent expense’ account with sub-accounts for ‘building rent’ and ‘equipment rent’.
4. Identifying which locations, events, items, or services bring in the most cash flow is key to better financial management.
5. Every time you record a business transaction—a new bank loan, an invoice from one of your clients, a laptop for the office—you have to record it in the right account.
6. This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business.

In simple terms, it’s what you have in the business as a company owner (or one of the company owners) or, often, an investor. Current liabilities are short-term debts (a company should pay off within a year), like bills and short-term loans. Long-term loans or leases and other long-term obligations (usually due beyond a year) are non-current liabilities. You can have multiple asset accounts, each representing a different type of asset.

Tip 1: Add just the right level of detail

As mentioned above, equity is one of the so-called balance sheet accounts, as it appears in the balance sheet. Equity is listed alongside liabilities, representing the shareholders’ stake in the company’s assets. The total equity amount reflects the company’s net worth or book value, which is the value of the assets minus the liabilities. If you’re using accounting software and want to set up a customized chart of accounts, you can add or edit parent and sub-accounts to the existing default chart of accounts. Doing this will help you stay organized and better understand how your business is doing financially.

Income Statement

The revenue accounts appear based on the source of where the income comes from. Liabilities are the amounts of money a company owes to others or the operating expenses definition obligations it needs to fulfill in the future. Think of debts to suppliers, loans from banks, or unpaid expenses – they are your liabilities.

It reflects the company’s ability to generate income from its core operations, indicating its financial health and growth potential. A general ledger stores a detailed record of a company’s financial activities, facilitating the preparation of financial statements and performance analysis. Meanwhile, let’s look at the general ledger real quick because general ledger uses the accounts listed in the chart of accounts to record and organize financial transactions. The chart of accounts, at this point, serves as a structure under which the general ledger operates. You’ll notice that each account in the chart of accounts for Doris Orthodontics also has a five-digit reference number preceding it.

The chart of accounts helps you organize your transactions into a convenient view of how the money moves through your business. This numbering system helps bookkeepers and accountants keep track of accounts along with what category they belong two. For instance, if an account’s name or description is ambiguous, the bookkeeper can simply look at the prefix to know exactly what it is. An account might simply be named “insurance offset.” What does that mean? The bookkeeper would be able to tell the difference by the account number. An asset would have the prefix of 1 and an expense would have a prefix of 5.

It provides you with services a birds eye view of every area of your business that spends or makes money. The main account types include Revenue, Expenses, Assets, Liabilities, and Equity. The COA is typically set up to display information in the order that it appears in financial statements. That means that balance sheet accounts are listed first and are followed by accounts in the income statement.

The first digit in the account number refers to which of the five major account categories an individual account belongs to—“1” for asset accounts, “2” for liability accounts, “3” for equity accounts, etc. Many organizations structure their COAs so that expense information is separately compiled by department. Thus, the sales department, engineering department, and accounting department all have the same set of expense accounts.

Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Today, the chart of accounts is an integral element of accounting software, and its use is widespread across various industries and organizations.