Chart of Accounts: Definition and Examples

In a chart of accounts, your accounts are shown in the same order they appear on your financial statements and are usually broken down into five main categories. One of the main functions of a chart of accounts is to facilitate double-entry accounting, a record-keeping system that documents each business transaction twice. One entry shows the source of money, the other entry shows the money’s destination. A chart of accounts helps you keep track of your transactions by breaking them down into five main categories.

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The chart of accounts you create for your business will act as the foundation for all your financial recordkeeping, so it’s a crucial document for your business. Because the chart of accounts organizes all the data related to your business’s finances, it’s a useful tool for quickly and easily creating financial statements. To make a chart of accounts for your small business, you’ll first need to create account categories that apply to your company. The chart of accounts is the first step in creating your business’s accounting system, so it starts with organizing all your company’s financial information. You’ll then assign a four-digit numbering system to the accounts you’ve created. Depending on your organizational structure, you can create more than one model chart of accounts.

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Companies often use the chart of accounts to organize their records by providing a complete list of all the accounts in the general ledger of the business. The chart makes it easy to prepare information for evaluating the financial performance of the company at any given time. As time goes by, you may find yourself wanting to create a new line item for each transaction. However, doing so could litter your company’s chart and make it confusing to navigate. Instead, take advantage of your accounting software’s sub-accounts. Each time you add or remove an account from your business, it’s important to record it into the correct account.

• Most companies choose a metric such as labor hours and estimate a rate per labor hour that “uses up” these indirect costs over the course of a month or year.
• Expense accounts are all of the money and resources you spend in the process of generating revenues, i.e. utilities, wages and rent.
• In your general ledger expense accounts, you’ll see your recurring payments, like rent, utilities, and insurance.
• 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.
• Now that you have revenue figured out, you’re ready to set up your cost of goods sold accounts.

The only complication is breaking COGS out into materials and labor, so that you can track what you spend on raw material inputs versus people inputs. First, for revenue, think about your different revenue streams and group them into broad functional categories. Three or four categories are usually sufficient for a small or medium-size business (SMB), or even just one might be enough.

Importance of a Good Chart of Accounts

It lists specific types of accounts, describes each account, and includes account numbers. A chart of accounts typically lists asset accounts first, followed by liability and capital accounts, then revenue and expense accounts. 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 next step is to identify the accounts and categories that you will use to track your financial transactions.

Intuit Inc. does not warrant that the material contained herein will continue to be accurate nor that it is completely free of errors when published. Now that your COA is set up, it’s important to keep it organized as you continue to add or adjust accounts. The following tips will help you set your chart of accounts up for success. Accounting systems, by definition, have a general ledger in which your asset accounts (what you own) match your liability accounts (what you owe). The Chart of Accounts is a list of accounts that your company needs for recording transactions.

Each transaction is organized by category to provide a clear breakdown of what was earned and spent. One of the advantages of a powerful chart of accounts is that it can prolong the useful life of even entry-level accounting software. Often how to set up a chart of accounts frustration with financial reporting can be fixed by remodeling the chart of accounts, rather than going through the very painful process of migrating to new software. Accounts are the specific “bins” that hold accounting transactions.

• As a limited liability corporation providing a service to customers, some of the accounts to include are asset, expense and income accounts.
• One entry shows the source of money, the other entry shows the money’s destination.
• The models provide an account description that is tied to a cost code and a cost type.
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