Chart of Accounts
Chart of Accounts Definition
The chart of accounts lists all the accounts a company has available to use in the financial statements. It can be added to or changed to suit the business needs. For example, manufacturing may need different codes to a retail business.
Most accounting software has a set chart of accounts (CoA) when it is set up. During setup, some more advanced software includes choosing your business type and adding additional codes.
Below are some examples of accounts that your small business may use. This article will look into each section of these in more detail.
Each account allows you to track transactions within the software and produce financial statements, including Balance Sheet and Income statement (Profit and Loss).
Importance of the Chart of Accounts
The chart of accounts is the foundation of the businesses accounting system. Using the wrong account code or not having enough codes will limit or produce incorrect financial statements. The accounts list may also include codes you do not require but are worth keeping for future use.
If you use an Excel spreadsheet, you will still have a list of accounts, although this may be simplified to a cloud accounting-based software package. Our free Excel cashbook template allows you to name your accounts. It includes 5 income accounts and 13 expense accounts.
Chart of Accounts Software
Producing a chart of accounts can be cumbersome if done manually. However, using accounting software makes this process much easier. The software will have a pre-built accounting numbering chart, saving you time and effort. Additionally, you can adjust the chart to better suit your needs by adding specific accounts.
Some packages ask for the business’s industry when setting up the software. This allows the chart of accounts to be more industry-specific.
Chart of Accounts Numbering
Looking at different cloud accounting software, each has its standard chart numbering system. We will look at a few. Most accounting software’s bank and cash accounts are set up through banking rather than the CoA.
Xero Sample Chart of Accounts – taken from the demo
| Description | Number |
|---|---|
| Bank | 090 – 199 |
| Revenue Accounts | 200 – 299 |
| Direct Costs | 300 – 399 |
| Overheads | 400 – 499 |
| Current Assets | 600 – 699 |
| Fixed Assets | 700 – 799 |
| Current Liability Account | 800 – 949 |
| Equity | 950 – 999 |
QuickBooks CoA
| Description | Number |
|---|---|
| Assets | 10000 – 19999 |
| Liabilities | 20000 – 29999 |
| Equity | 30000 – 39999 |
| Income | 40000 – 49999 |
| Cost of Goods Sold | 50000 – 59999 |
| Expenses | 60000 – 69999 |
| Other Income | 70000 – 79999 |
| Other Expenses | 80000 – 89999 |
As you can see from the two accounting numbering examples, the system is different. Xero uses smaller numbers than QuickBooks. Sage uses a different numbering system starting from 0010 and ending 9999. Don’t worry about the system you use, as you will soon get used to the account codes and where to add them.
All accounting packages use an accounting chart of accounts. Bookkeeping software is more flexible and often saves business time on the accounts.
Chart of Accounts Example
Our sample chart of accounts uses the numbering system from Xero. It is a simple set but will show how they are formatted. It is split between bank, income, direct costs, expenses, assets, liabilities and equity.
Download the above list in PDF format.
The Financial Statements
The chart of accounts serves as the foundational framework used to generate the financial statements for a business. These financial statements, which include the balance sheet, income statement, and cash flow statement, are the principal reports a company relies on for making informed decisions.
The reports play a crucial role in both the monthly financial management and the annual financial review process. By categorising each financial transaction in the chart of accounts, businesses are able to produce accurate and comprehensive financial statements that are essential for strategic planning and financial analysis throughout the fiscal year.
Here, we will look at the two main reports, the balance sheet and profit and loss.
The Balance Sheet Accounts
The balance sheet accounts give a snapshot of the business on any given date. It is made up of the following accounts. It is used to see the financial health of the company.
Asset Accounts
Assets are what the business owns and includes the following:
Fixed Assets – These are physical items like computers, machinery, furniture, fixtures and fittings.
Intangible Assets – You can’t see these assets; examples are goodwill, trademarks and patents.
Current Assets – A business can quickly convert these assets to cash and include bank, cash and accounts receivable.
Liability Accounts
Liabilities are accounts that the business owes to other businesses or people. They are split into two:
Current liabilities are short-term debts that the business owes and include accounts payable, short-term obligations, and accruals.
Long-Term Liabilities – Long-term debts, including mortgages and long-term loans
Equity Accounts
Equity accounts show the ownership of the business; the accounts might include owners and shareholders equity and retained earnings.
The Income Statement Accounts
The income statement, also known as the profit and loss statement, provides a detailed overview of all the income and expenses incurred by a business during a specific period. This financial document is crucial for assessing the company’s operational efficiency by showing the revenue generated from sales and services alongside the costs and expenses associated with business operations.
Income Statement Accounts – These are the income accounts for the business. Depending on the size and type of sales will depend on the account codes you may need. A few examples are sales of products, consultancy, parts, support, and interest received.
Cost of Sales – These are the costs that relate directly to the income accounts and might include wages, parts and packaging.
Expense Accounts – These are the main expenses of a business and include general office expenses, utilities, wages, travel and insurance.
Trial Balance
A report that bookkeepers and accountants use is a trial balance. The trial balance lists all the accounts and the debits and credits related to them.
The trial balance is helpful to see all the accounts on one report and is used mainly at the financial year-end.
Non-Profit Chart of Accounts
When setting up a non-profit, you will need to look at if you have any particular restrictions.
An example of this is if a donation is restricted to specific expenses. If there are restrictions, set up nominal codes to keep track of the balance for that fund. Another way of tracking restricted funds is to use classes or departments in some cloud accounting packages.
Most small non-profit organisations can work with a simple set of CoA.
Adding Nominal Codes
When you need to add new nominal codes to your CoA, it is worth checking if a code is already in use that is suitable for the purpose. If not, then choose the best code number to use and complete the details. To check what information is needed, look at previous code details, which should help.
If you need to edit a nominal code, check to see if the transaction has already been posted and if it will cause any problems with the previous transactions. In most cases, it is better to set up a new code.
Chart of Accounts UK
The UK operates similarly to other countries in many respects; however, one notable distinction lies in the VAT (Value Added Tax) rates. You can enter the VAT rates when setting up nominal codes for financial transactions in the UK. The standard VAT rate is 20%.
Chart of Accounts Summary
In this article, we have looked at the chart of accounts and how they work to produce financial reports, including the balance sheet and profit and Loss. There are five main categories of accounts: assets, liabilities, equity, income, and expenses. Each category represents a different aspect of a company’s financial transactions.
Return from the Chart of Accounts to the Accounting Basics page.
