What is a chart of accounts (COA)?

What is a chart of accounts (COA)?

A chart of accounts (COA) is a list of all the different accounts a business uses to record its financial transactions. Each account is assigned a unique number and is categorised based on its nature, such as assets, liabilities, equity, revenue, and expenses.

A COA helps organise the financial information in a systematic way, making it easier for the company to track its financial health and prepare financial statements. It also serves as a guide for recording and reporting financial transactions accurately, ensuring consistency and transparency in the accounting processes. Overall, a well-organised chart of accounts is essential for effective financial management and decision-making within a business.

Example of how a chart of accounts works

Let’s say a business keeps track of their money using categories. They have categories for things like cash on hand, money owed to them by customers, and supplies they have left. When something happens with their money, they move it between categories.

For example, if they pay salaries, they take money out of their “cash” category and record it as a payment (debit) in their “salaries” category. This way, they can easily see where their money goes and how much they have left of everything. It’s like keeping separate folders in the same file cabinet for different things. This helps businesses make smart decisions about their money and keep their financial records accurate.

Understanding common chart of account categories

Having the correct account types and categories make it easier for a business to find information about different financial areas. Here’s a breakdown of what’s usually in the file cabinet for small businesses bookkeeping purposes:

Assets

This of this category everything valuable the company has. It can be cash in the bank, inventory ready for sale, or even equipment used to make products or deliver services. Assets can be further classified as current assets and non-current assets.

Liabilities

This category holds all of the money that the business owes to suppliers, vendors, lenders, providers, and the like. A business would most commonly check the liabilities account to stay on top of their bills. This account has two main sections called current liabilities (to be paid within the year) and non-current liabilities (longer-term debts like business loans).

Equity

This account shows how much money a businessowner has invested in their own business. Depending on the structure, it could be called owner’s capital, partner’s capital, or shareholder’s equity.

Revenue

This account is all about the income generated by a business through products or services. Receipts and other transaction documents come into play here for proper bookkeeping.

Expenses

This account tracks all the costs a business incurs for operational purposes. It’s like all the bills they have to pay to keep the business running smoothly. Some common examples are cost of materials, salaries paid to employees, and rent.