Classification of accounts Outline

3. Chart of accounts

A chart of accounts (COA) is a listing of each account a company owns, along with the account type and account balance, shown in the order the accounts appear in the company’s financial statements. “Chart of accounts” is the official accounting term for the display of this information, which includes both balance-sheet accounts and income-statement accounts.

An account is a unique record for each type of asset, liability, equity, revenue and expense. The chart of accounts is a financial organizational tool that provides a complete listing of every account in the general ledger of a company, broken down into subcategories. Each chart in the list is assigned a multi-digit number to help identify the account type (e.g., all asset accounts might start with the number 1). Typically, a COA contains the accounts’ names, brief descriptions and identification codes.

Using a COA, balance sheet accounts are listed first that is, assets, liabilities and shareholders' equity. Accounts in the income statement — revenues and expenses — are presented next.

For a small corporation, the chart of accounts might include these sub-accounts under the assets account:

• 
  Cash
  
• 
  savings account
  
• 
  petty cash balance
  
• 
  accounts receivable
  
• 
  undeposited funds
  
• 
  inventory assets
  
• 
  prepaid insurance
  
• 
  vehicles
  
• 
  buildings
  

Liabilities account may have sub-accounts, such as:

• 
  the company credit card
  
• 
  accrued liabilities
  
• 
  accounts payable
  
• 
  payroll liabilities
  
• 
  notes payable
  

Shareholders' equity can be broken down into the following accounts:

• 
  common stock
  
• 
  preferred stock
  
• 
  retained earnings
  

Within the accounts of the income statement, the revenues and expenses accounts could be broken into operating revenues, operating expenses, non-operating revenues and non-operating losses. In addition, the operating revenues and operating expenses accounts might be further organized by business function and/or by company divisions. Many organizations structure their chart of accounts so that expense information is separately compiled by department; thus, the sales department, engineering department and accounting department all have the same set of expense accounts. Examples of expense accounts include cost of goods sold (COGS), depreciation expense, utilities expense, wages expense, etc.

Even a small company could have dozens of accounts in its chart of accounts. The larger and more complex the company, the larger and more complex the chart of accounts will be, but accounting software makes it easy to categorize accounting entries correctly and maintain an accurate and organized chart of accounts.