Introduction to the Chart of Accounts

If you’re anything like we are at Ignite Spot, you’re a huge fan of detailed record keeping and inventing new systems for accurately counting beans. If, on the other hand, bean counting isn’t your idea of a good time (seek professional help because that’s insane), you might not be terribly familiar with the world of accounting. To help familiarize others with the wonderful world of financial bookkeeping, we like to provide information detailing the nuances of finance.

A chart of accounts is a very important aspect of bookkeeping and one with which many are unfamiliar.

What is a Chart of Accounts?

A chart of accounts (COA) is a chart… of your accounts. More specifically and less sarcastically, a COA is a structured compendium of your organization’s various accounts, providing you with an overview of all financial transactions. The COA will allow you to understand your cash flow for daily operations at a quick glance.

Charts of accounts are generally structured as lists inside of a table, having five separate account types: assets, liabilities, equity, revenues, and expenses. The accounts listed in your COA are typically assigned numerical identifiers whose first digit denotes the type of the account.

• 1XXX Assets

Asset accounts are assigned with a 1 as the first digit in a standard COA. Assets that should be included in your COA are things such as physical assets like equipment, cash, and real estate as well as intangible assets like trademarks, copyrights, and patents.

• 2XXX Liabilities

Liability account numbers begin with a 2 in most charts of accounts. A liability account tracks money your company owes, such as office building rent, employee wages, and anything purchased on credit.

• 3XXX Equity

Equity account numbers typically begin with a 3. Equity is the product of all assets less all liabilities and is generally considered to be the value of a company for its shareholders.

• 4XXX Revenue

Revenue account numbers begin with a 4. Revenue tracks the organization’s income from its sales of services or products.

• 5XXX Expenses

Expense accounts are numbered beginning with a 5. An expense is incurred any time a company spends money in the pursuit of making income, such as advertising fees, cost of goods sold, and taxes paid.

Putting it All Together

A chart of accounts is a great tool for offering instant visibility into the overall financial health of your organization. However, utilizing a COA properly is essential to ensure the COA remains relevant while focusing on the key aspects of your organization’s financial performance. Creating and maintaining an insightful chart of accounts requires consistency, attention to detail, and practical decision-making.

Applying a consistent structure to your COA will ensure optimal readability while also making it easier to maintain and update. Establishing set rules for how the COA should be formatted and how account numbers are assigned will make it easier to keep track of everything down the road. Regularly updating your COA will ensure the data is as up to date and relevant as possible.

If you could use some help with your financial bookkeeping or just want to speak with a fellow bean counting expert, get in touch with Ignite Spot today. We offer financial services ranging from tax preparation to virtual CFO consulting. Contact us today to learn more.

Photo by Raymond Rasmusson on Unsplash