What Are Chart of Accounts? How It Works, Setting up & Pros

The general ledger provides a comprehensive view of your financial activities. However, a profit residual claim to assets definition and loss (P&L) statement overviews revenues and expenses. It’s not always fun seeing a straightforward list of everything you spend your hard-earned money on, but the chart of accounts can give you an important view of your spending habits. You can get a handle on your necessary recurring expenses, like rent, utilities, and internet.

What is a Chart of Accounts? A How-To with Examples

Business owners who keep a chart of accounts handy will have an advantage when it comes to accounting. Liability accounts also follow the traditional balance sheet format by starting with the current liabilities, followed by long-term liabilities. The number system for each liability account can start from 2000 and use a sequence that is easy to follow and compare in different accounting periods. When setting up a chart of accounts, typically, the accounts that are listed will depend on the nature of the business. For example, a taxi business will include certain accounts that are specific to the taxi business, in addition to the general accounts that are common to all businesses.

Without a chart of accounts, it’s impossible to know where your business’s money is. The chart of accounts is like a map of your business and its various financial parts. Expense accounts are all of the money and resources you spend in the process of generating revenues, i.e. utilities, wages and rent. Revenue accounts keep track of any income your business brings in from the sale of goods, services or rent. Your chart of accounts is a living document for your business and because of that, accounts will inevitably need to be added or removed over time. The general rule for adding or removing accounts is to add accounts as they come in, but wait until the end of the year or quarter to remove any old 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. Changes – It’s inevitable that you will need to add accounts to your chart in the future, but don’t drastically change the numbering structure and total number of accounts in the future. A big change will make it difficult to compare accounting record between these years.

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For example, asset accounts for larger businesses are generally numbered 1000 to 1999 (or 100 to 199), and liabilities are generally numbered 2000 to 2999 (or 200 to 299). Small businesses with fewer than 250 accounts might have a different numbering system. A chart of accounts gives you great insight into your business’s revenue beyond just telling you how much money you earn. It shows peaks and valleys in your income, how much cash flow is at your disposal, and how long it should last you given your average monthly business expenses. Revenue accounts capture and record the incomes that the business earns from selling its products and services. It only includes revenues related to the core functions of the business and excludes revenues that are unrelated to the main activities of the business.

Does every business have to have its own Chart of Accounts?

1. Keeping an updated COA on hand will provide a good overview of your business’s financial health in a sharable format you can send to potential investors and shareholders.
2. Revenue and expense accounts are listed next and make up the income statement, which provides insight into a business’s profitability over time.
3. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
4. The first digit in the account number refers to which of the five major account categories an individual account belongs to—“1” for asset accounts, “2” for liability accounts, “3” for equity accounts, etc.

Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. There are a few things that you should keep in mind when you are building a chart of accounts for your business.

A chart of accounts organizes your finances into a streamlined system of numbered accounts. You can customize your COA so that the structure reflects the specific needs of your business. To create a COA for your own business, you will want to turbotax business cd begin with the assets, labeling them with their own unique number, starting with a 1 and putting all entries in list form. The balance sheet accounts (asset, liability, and equity) come first, followed by the income statement accounts (revenue and expense accounts). The chart of accounts is a tool that lists all the financial accounts included in the financial statements of a company.

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Keeping your accounts in place and up-to-date is important for analyzing your finances. A chart of accounts gives you a clear picture of how much money you owe in terms of short- and long-term debts. Your COA can help you determine how much of your monthly income you can afford to put toward your debts and help you develop longer-term debt repayment plans. Some of the sub-categories that may be included under the revenue account include sales discounts account, sales returns account, interest income account, etc. 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.

If you don’t leave gaps in between each number, you won’t be able to add new accounts in the right order. For example, assume your cash account is and your accounts receivable account is 1-002, now you want to add a petty cash account. Well, this should be listed between the cash and accounts receivable in the chart, but there isn’t a number in between them. A well-designed chart of accounts should separate out all the company’s most important accounts, and make it easy to figure out which transactions get recorded in which account. For example, a business vehicle you own would be recorded as an asset account. As your business grows, so will your need for accurate, fast, and legible reporting.

An added bonus of having a properly organized chart of accounts is that it simplifies tax season. The COA tracks your business income and expenses, which you’ll need to report on your income tax return every year. It includes a list of all the accounts used to capture the money spent in generating revenues for the business.

The information is usually arranged in categories that match those on the balance sheet and income statement. The main accounts within your COA help organize transactions into coherent groups that you can use to analyze your business’s financial position. In fact, some of the most important financial reports — the balance sheet and income statement — are generated based on data from the COA’s main accounts. The first three are assets, liabilities, and equity, which flow into the balance sheet. The remaining two are income or revenue and expenses, which flow into the income statement. Some businesses also include capital and financial statement categories.