What Is a Chart of Accounts?

A chart of accounts (COA) is an index of all of the financial accounts in a company's general ledger. In short, it is an organizational tool that lists by category and line item all of the financial transactions that a company conducted during a specific accounting period. Large and small companies use a COA to organize their finances and give interested parties, such as investors and shareholders, a clear view and understanding of their financial health. Separating expenditures, revenue, assets, and liabilities helps to achieve this and ensures that financial statements are in compliance with reporting standards.

Here is a way to think about a COA as it relates to your own finances. Say you have a checking account, a savings account, and a certificate of deposit (CD) at the same bank. When you log in to your account online, you’ll typically go to an overview page that shows the balance in each account. Similarly, if you use an online program that helps you manage all your accounts in one place, like Mint or Personal Capital, you’re looking at basically the same thing as a company’s COA. You can see all your assets and liabilities on one page. There is no single format for a chart of accounts. Typically, they all follow the essential structure described below. But the final structure and look will depend on the type of business and its size.

COA Structure

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.

These primary accounts of assets, liabilities, shareholders' equity, revenue, and expenses can then be broken down into sub-accounts such as operating revenues, operating expenses, non-operating revenues, and non-operating losses. In addition, the operating revenues and operating expenses accounts might be further organized by business function and/or by company divisions.

As an example, a small company COA might include these sub-accounts under the primary assets, primary liabilities, and primary shareholders' equity accounts:

Assets

• Cash
• Savings account
• Petty cash balance
• Accounts receivable
• Undeposited funds
• Inventory assets
• Prepaid insurance
• Vehicles
• Buildings

Liabilities

• Company credit card
• Accrued liabilities
• Accounts payable
• Payroll liabilities
• Notes payable

Shareholders' equity

• Common stock
• Preferred stock
• Retained earnings

Why Is a Chart of Accounts Important?

It is a very important financial tool that organizes a lot of financial transactions in a way that is easy to access. Because transactions are displayed as line items, they can quickly be found and assessed. This is crucial for providing investors and other stakeholders a bird's-eye view of a company's financial data.

Is There a Single COA Format?

Not precisely. A company can use, create, or modify any format that it wishes. But experience has shown that the most common format organizes information by individual account and assigns each account a code and description. What's important is to use the same format over time for the consistency of period-to-period and year-to-year comparisons.

Is a Chart of Accounts Required?

No, but it's considered necessary by all kinds of companies seeking to categorize all of their transactions so that they can be referenced quickly and easily. Source