What is a Chart of Accounts

A chart of accounts (COA) is an index of all financial transactions in a company’s general ledger. It separates and categorises expenditures, revenue, assets and liabilities to give an overall financial picture. It is like a log book which outlines everything financial going on in your business. Its true purpose is to keep you informed on all areas of your business’ finances.

Components of a Chart of Accounts

There are several components that make up a chart of accounts, which includes five main financial accounts: assets, liabilities, equity, revenue and expenses. Each account is assigned a ‘type’ that identifies how a transaction is to be coded. It can also consist of a range of subaccounts for each. Let’s look at each of these main accounts, and their sub accounts, which offer more granularity for better financial management and reporting, in a little more detail.

Asset Accounts

Asset accounts include things such as cash, accounts receivable, inventory, and fixed assets. It represents resources that the business owns or controls and is expected to provide future economic benefits. Each asset account tracks the value of specific resources, helping businesses monitor and manage their financial health. These accounts are categorised on the balance sheet in a certain range (often starting with ‘1’), typically listed in order of liquidity.

Asset accounts generally fall into two main types:

1. Current Assets: Including assets that are expected to be used or converted into cash within a year – cash, accounts receivable, inventory, and short-term investments.
2. Non-Current Assets (or Fixed Assets): These are long-term investments that are expected to provide benefits over a longer period – property, plant, equipment, and intangible assets like patents or trademarks.

Sub accounts within an Asset Account would include such things as:

• Cash
• Accounts Receivable
• Inventory

Liability Accounts

A liability account represents obligations or debts a business owes to others, either to be settled with cash, goods, or services. This account is essential for tracking a business’s financial obligations and appear on the balance sheet alongside asset and equity accounts. Typically, liability accounts are given account numbers starting with ‘2’.

These accounts are categorised into two main types:

1. Current Liabilities: Debts due within a year, such as accounts payable, short-term loans, wages payable, and taxes owed.
2. Non-Current Liabilities: Long-term obligations, such as long-term loans, bonds payable, and lease obligations, which are due after a year.

Sub accounts within Liability Accounts would include such things as:

• Accounts Payable
• Loans Payable

Equity Accounts

An equity account represents the owners’ residual (net) interest in the business after liabilities are subtracted from assets. It reflects the value that belongs to the owners or shareholders. Equity accounts are crucial for showing how much capital the business has from its own internal sources. They are typically tracked with numbers beginning with ‘3’.

Common equity accounts include:

1. Owner’s Capital or Common Stock: This account tracks the initial and additional investments made by the business owners or shareholders
2. Retained Earnings: This account reflects the accumulated profits or losses of the business over time, minus any dividends paid to shareholders.
3. Dividends or Drawings: These accounts track distributions made to shareholders or owners, reducing the overall equity.

Sub accounts within Liability Accounts would include such things as:

• Retained Earnings
• Owners Capital

Revenue and Expense Accounts

Revenue and expense accounts track a business’ income and costs, helping to determine profitability. Both account types are essential for preparing the income statement and calculating net income, impacting the overall financial health of the business.

1. Revenue Accounts: These accounts record the income a business earns from its operations, such as sales, service fees, or interest revenue. They increase equity by adding to retained earnings. Common revenue accounts include Sales Revenue, Service Revenue, and Interest Income. They usually start with numbers like ‘4’ or ‘5’ in the chart of accounts.
2. Expense Accounts: These accounts track costs incurred by the business to generate revenue, including operating expenses (e.g., rent, utilities), cost of goods sold, and administrative expenses. Expenses reduce equity by decreasing retained earnings. Expense accounts typically include categories like Salaries, Rents, Utilities, and Depreciation, often starting with numbers like ‘6’ or ‘7’.

Sub accounts within Liability Accounts would include such things as:

• Sales Revenue
• Utilities
• Salaries and Wages

Chart of Accounts Benefit to Bookkeeping

A chart of accounts (COA) provides key benefits to bookkeeping by organizing financial data into clear categories like assets, liabilities, revenue, and expenses. This structure improves the accuracy and efficiency of tracking and classifying transactions, making it easier to generate financial statements like income statements and balance sheets. A COA also enhances financial analysis by offering detailed insights into specific accounts, helping to monitor business performance. Additionally, it aids in compliance and auditing by keeping records well-organised and accessible. Such compliances would include payroll, BAS requirements, annual tax returns and superannuation requirements. The COA can be customised to suit a business’ unique needs, further improving financial management.

If you are still not sure, or need help with setting up your chart of accounts, then contact us at Numble for an obligation free consultation.