Chart of Accounts

What is Chart of Accounts (COA)? A Basic Guide

Tracking the incomings and outgoings of a business can be trouble, but it is crucial to get a deep insight into a business cash flow and to ascertain the financial stability of a business. Chart of Accounts (COA) is the index of all financial accounts to help you perform these tasks effectively. Let’s see: what is a chart of accounts, how COA works, the importance of COA, the subcategories of accounts and how to deal with COA.

 

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Understanding Chart of Accounts (COA)

Chart of accounts is the numbered list of all the financial accounts (nominal codes) in the general ledger of a business. In simple words, it is an organisational tool that provides a breakdown of every financial transaction (divided into subcategories) that a company performed during a specific time. COA is broken into subcategories.

COA is used to categorise a company’s accounts and classify the transactions, according to the accounts they affect. In a nutshell, it is the basic route to any accounting system. The uniform or standardised chart of accounts are the following:

Standard Chart of Accounts

  • Assets
  • Liabilities
  • Owner’s or Shareholder’s equity
  • Operating expenses
  • Cost of Goods Sold (COGS)
  • Revenues and other relevant accounts

 

How COA Works?

Businesses use COA to organise their financial statements and provide valuable insight to shareholders and investors into the financial health of a business. Separating revenue, assets, expenditures and liabilities helps you achieve this and ensures that the financial statements are in compliance with the reporting standards.

Here assets, liabilities and shareholders’ equity are shown first, followed by revenue and expenses appear.

 

Structure of COA

The listing of COA divides them by:

  • Where they belong: They may belong either to liabilities, equity or asset
  • Where they go to: They may either go to the income statement or balance sheet

 

Sub Categories of Accounts

Here are the subcategories of assets:

  • Cash
  • Fixed assets
  • Marketable securities
  • Accumulated depreciation
  • Accounts receivable
  • Prepaid expenses
  • Inventory
  • Petty cash
  • Allowance for doubtful accounts

Liabilities accounts can be subcategorised to:

  • Accounts payable
  • Accrued liabilities
  • Payroll liabilities
  • Notes payable
  • Taxes payable

While shareholders’ equity may include the following sub-categories of accounts:

  • Retained earnings
  • Preferred stock
  • Common stock

Revenue may have the following subcategories:

  • Revenue
  •  Sales returns and allowances

The expense may be subcategorised into:

  • Bank fees
  • Depreciation
  • Advertising
  • Rent
  • Supplies
  • Wages
  • Payroll tax
  • Costs of goods sold
  • Utilities, etc.

For locating specific accounts easily, especially for large companies, each COA contains a name, description and identification code. Generally, account numbers contain 5 digits (or more) and each digit shows a division of accounts, like the first digit 1 means assets, while the first digit 2 represents liabilities, etc.

 

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Importance of COA

Here are the reasons that make COA beneficial for businesses of all sizes:

  • Provides a clear picture of the financial health of your company
  • Useful for business owners, investors and shareholders
  • Easier to comply with financial reporting standards

 

How to Deal with COA?

The following are the tips to deal with a COA:

1) Optimise your COA: Keep reviewing your COA, if you think it needs to include more types of accounts for clarity and convenience for bookkeeping, do it.

2) Keep COA consistent: Make sure to choose the most convenient structure to keep your accounts organised to compare the future accounting data easily.

3) Do the changes on time: You have the choice to add an account at any time, whereas it is preferable to delete an account at the end of the accounting period.

 

Quick Sum Up

We hope you have got a better understanding of what is a chart of accounts, its structure, how it works, the importance of COA and how to deal with it. We would conclude our discussion by saying that knowing COA is essential for bookkeeping and accounting purposes. Additionally, it will help you to get a deep insight into your cash flow and improve the financial health of your busienss. 

 

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 Disclaimer: This blog contains general information on COA.

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