Inner Workings of a COA...

The Chart of Accounts (COA) is an index of all the financial accounts in your company’s general ledger.

The COA helps you break down all the financial transactions into specific time frames and subcategories. It separates your revenue, liabilities, assets, and expenditures into a manageable format; helping you to gain insight into the financial health of your business by allowing you to analyze your transactions at specific periods, within different areas of your business.

How does a Chart Of Accounts Work?

Accounts are shown in the order they appear on a business’s financial statements.

• Balance Sheet Accounts are shown first.

  • These consist of Assets, Liabilities, and Shareholders’ (or members) Equity.

• Income Statement Accounts are shown after the Balance Sheet Accounts.

  • These consist of Revenue and Expenses.

These broad categories have subcategories. Depending on the size and complexity of a business, there can be a significant number of sub-categories.

Examples of subcategories (or an “index”) are as follows:

• Assets: Cash, Accounts Receivable, Inventory, Land & Buildings, Equipment

• Liabilities: Short-term Loans, Accounts Payable, Payroll Payable, Taxes Payable

• Equity: Retained Earnings, General Reserve, Equity Share Capital

• Income: Sales Revenue, Interest Received

• Expense: Salary & Wages, Office Rent, Utility Expense, Miscellaneous Expense, Office Supplies.

COA Best Practices

An effective Chart of Accounts is structured to serve your managerial accounting purpose, based on your company's size, structure, and operations.

Use a standard COA as set forth by the tax authorities. If you are a business working in #multi-currencies and #cross-borders, the differing regulations and tax treaties need to be taken under consideration.

Design your COA with the future in mind. Consistency in the design and allowing for expansion will be helpful as your business grows.

If you keep adding new accounts, it will become difficult to compare your financial information over several periods or years.

Less is better. Watch for the creation of accounts which are not necessary (micro-managing) and can be integrated into more general accounts.

As a business grows, it will become necessary to add a numerical indexing function to your COA (not necessary for a small business - but it can be designed on a smaller scale). This will help organize the financial reporting and indexing of transactions.

This is a unique code allotted to each account in a structured manner, with digits signifying the account type (asset class) and other specific information structured for your business.

The Chart of Accounts and account numbering should be structured to follow standard accounting norms.

If you have any questions regarding bookkeeping, please do not hesitate to contact us and schedule a FREE 30 minute consultation.