What Is a Chart of Accounts (COA)?
A chart of accounts (COA) is an index of all the financial accounts in the general ledger of a company. In short, it is an organizational tool that provides a digestible breakdown of all the financial transactions that a company conducted during a specific accounting period, broken down into subcategories.
- A chart of accounts (COA) is a financial organizational tool that provides a complete listing of every account in the general ledger of a company, broken down into subcategories.
- It is used to organize finances and give interested parties, such as investors and shareholders, a clearer insight into a company’s financial health.
- To make it easier for readers to locate specific accounts, each chart of accounts typically contains a name, brief description, and an identification code.
How Charts of Accounts (COA) Works
Companies use a chart of accounts (COA) to organize their finances and give interested parties, such as investors and shareholders, a clearer insight into their financial health. Separating expenditures, revenue, assets, and liabilities help to achieve this and ensure that financial statements are in compliance with reporting standards.
The list of each account a company owns is typically shown in the order the accounts appear in its financial statements. That means that balance sheet accounts, assets, liabilities, and shareholders' equity are listed first, followed by accounts in the income statement — revenues and expenses.
For a small corporation, COAs might include these sub-accounts under the assets account:
- Savings account
- Petty cash balance
- Accounts receivable
- Undeposited funds
- Inventory assets
- Prepaid insurance
Liabilities account may have sub-accounts, such as:
Shareholders' equity can be broken down into the following accounts:
To make it easier for readers to locate specific accounts, each chart of accounts typically contains a name, brief description, and an identification code. Each chart in the list is assigned a multi-digit number; all asset accounts generally start with the number 1, for example.
Here is a way to think about how COAs relate 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, what you’re looking at is basically the same thing as a company’s COA. You can see all your assets and liabilities, all on one page.
Example of a COA
Within the accounts of the income statement, revenues and expenses could be broken into 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.
Many organizations structure their COA 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. Examples of expense accounts include the cost of goods sold (COGS), depreciation expense, utility expense, and wages expense.
COAs can differ and be tailored to reflect a company’s operations. However, they also must respect the guidelines set out by the Financial Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP).
Of crucial importance is that COAs are kept the same from year to year. Doing so ensures that accurate comparisons of the company’s finances can be made over time.