The chart of accounts (CoA) is considered one of the crucial tools for financial management. It is a useful record-keeping system for a company’s financial accounts that manage all financial transactions.
What is a chart of accounts (CoA)?
A chart of accounts is vital for all financial accounts in a company’s general ledger. The general ledger is a company’s record-keeping system. It divides financial transactions during a particular accounting period into particular account types. The general ledger and CoA help you know where to record financial transactions, making it easy to access. You can get bookkeeping services for small businesses to ensure accurate records.
Why are charts of accounts important?
The chart of accounts is important for good bookkeeping and financial management. The Chart of Accounts simplifies the process of tracking expenses and account balances, enabling you to easily calculate financial ratios and assess a company’s economic condition. As it is an index, it makes it easy to track cash flow and look up numbers of the company. It makes bookkeeping easy and simple. A well-designed CoA makes you able to make better decisions for your company, check your company’s financial status and follow reporting and accounting standards.
Generally, the chart of accounts includes:
- Revenue
- Equity
- Assets
- Expenses
- Liabilities
Balance Sheet Accounts
The balance sheet accounts create a part of frequently used financial reports. These are reports that show the financial status of the company. They provide investors with an insight into the company’s financial health – the liabilities and assets and how this is related to shareholder ownership. The balance sheet accounts are divided into three categories:
- Asset accounts – they have information on all physical assets owned by your company, including both tangible items such as property, land, and furniture, and intangible assets like software, patents, and trademarks.
- Liability accounts – the debts that your business has. Each liability account will have the word ‘payable’ in its name. For instance, wages payable, invoices payable, and accounts payable. Liabilities are unearned revenue that your company has not received yet.
- Equity accounts – they have what’s left from the company’s financial records after deducting all the business’s liabilities from its assets. They show the worth of a company to its shareholders or owners.
Income Statement Accounts
Income statement accounts are divided into two categories:
- Revenue accounts – they monitor the income generated by a company by selling services, goods or rent.
- Expense accounts – these accounts show all the money that you spend to produce income. Expense accounts include both fixed and direct expenses.
The income statement and balance sheet work together. Revenue increases company assets and equity, while expenses decrease them.
Basic things of chart of accounts
- Account descriptions
The chart of accounts must be short and easy to understand next to each account type and account name. Names like credit cards, accounts receivables, and fees earned, all have suitable details. These descriptions are vital.
- Wait until the end of the year before deleting accounts
It’s suggested to wait until the end of the financial year before deleting accounts. Removing or changing accounts mid-year can lead to complexity during tax season.
- Avoid creating too many accounts
Your chart of accounts serves as an index and a quick reference guide. There’s no need to set up a separate account for every transaction, utility, or sale. Instead, group similar items together. This approach prevents an overload of overly specific accounts and saves you from a tedious cleanup at year-end.
- Ensure to be consistent with CoA
It’s ideal if your Chart of Accounts (CoA) remains relatively stable from year to year. Why? Consistency makes it easier to compare account performance over time. Frequent changes like splicing, merging, or deleting accounts can result in the loss of valuable financial data. Additionally, reconstructing old accounts can be time-consuming and prone to errors, leading to inaccurate data.
Conclusion
The blog outlines basic information related to the chart of accounts. For more information, you can speak to us and get our Reliable Bookkeeping Services.