What Is A Chart Of Accounts?

A chart of accounts (CoA) is a small business accounting tool that lists all the financial accounts in a company’s general ledger. It’s somewhat like a filing cabinet for your company’s accounting system that organizes transactions into groups.

Put simply; it’s an accounting tool that allows you to organize all the intricate details of your firm’s finances into an accessible format.

Chart of Accounts – Meaning and How it Works

A standard chart of accounts will have five primary accounts, including assets, liabilities, equity, revenue, plus expenses, which are used to generate the balance sheets and income statements. As such, you’ll find a significant number of subcategories in a CoA that may be listed in the following order:

 The chart of accounts might vary from one company to the next and by industry. Furthermore, you can structure your accounts by categorizing item lines according to business function, product line, department, or company division. For this reason, a chart of accounts will likely be as large and as complex as the company itself.

Each account may contain an identification code, description, and name to make it easier to locate specific accounts.

Understanding Why a Chart of Accounts is Important

A chart of accounts is an excellent addition to your financial analytics tools as it provides a digestible breakdown of all business transactions. 

Every time you record a business transaction – an invoice from a customer or an influx of funding from an angel investor – you have to record it in the correct account. So you’ll log two entries: a debit from one account and a credit to another. Doing so gives you a clearer insight into your company’s financial health. Moreover, it ensures you have all the information needed to evaluate your company’s financial performance at any given time.

Here are some other ways having a chart of accounts can benefit your business:

1. Understand your earnings and expenses

If the revenue from sales covers your expenses, you’re turning a profit. That said, business owners should look beyond a simple profit dollar amount as it doesn’t tell you why your business is profitable. A chart of accounts doesn’t just tell you how much money you earn and spend; it shows the peaks and valleys in your income, effectively allowing you to make better business decisions. 

2. More effective debt management

Utilizing and controlling debt effectively is key to success when running a business. But, conversely, when mismanaged, debts can sink your business. And this is precisely why you need a chart of accounts to give you better insight into your company’s finances. This way, you can develop an affordable debt repayment plan.

3. Improve compliance and reporting

A chart of accounts organizes your finances into a streamlined system of numbered accounts, making it easier to generate and analyze financial reports and ensure tax compliance. 

Get the Bookkeeping Support You Need

A chart of accounts is central to good bookkeeping. So let us help you set up a chart of accounts so you can easily record transactions, review revenues plus expenses in detail, and prepare financial statements. Our bookkeeping services include everything from basic data entry to tax prep. Contact us today to get started.