Finance

What is a Chart of Accounts And How Does it Work?

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Business is all about the flow of money. Money coming in and money going out that will equate to a profit if your accounts are well-managed. While traditionally managing accounts and keeping track of everything took a huge number of data entry hours and personnel, technology is here to lend a helping hand to make your chart of accounts more valuable.

What is the purpose of a chart of accounts?

A chart of accounts (COA) has a number of important purposes in business. It acts as a base of financial data that managers can draw on to analyse spending, budgets and net revenue and it also provides a breakdown of financial categories so that different aspects of a company’s financial standings can be instantly accessed, compared and assessed, even in real-time. 

There are standards that a business must meet for financial record keeping, a well-run chart of accounts helps maintain compliance as well as assist with smooth transitions for tax lodgments and audits.

What is in a chart of accounts?

A chart of accounts is a system that indexes financial accounts across key financial domains. Typically business domains fall into five key branches with a huge scope for sub-branches below:

Assets

Resources that hold value can include; equipment, cash, accounts receivable, vehicles

Liabilities

Any debts currently owed will also be listed in your chart of accounts. This will be somewhat fluid as accounts payable will be continually in motion, but other liabilities such as outstanding taxes and business loans will have a higher impact. 

Equity

Equity is calculated by subtracting the total liabilities from the total assets total. Equity also takes into consideration assets such as stocks (preferred as well as common) and any retained earnings.

Expenses

As well as spending money to achieve revenue, businesses also spend resources. These are listed under expenses and can include rent and utilities to run a commercial premises, payroll, and travel expenses.

Revenue

Selling goods or services bring revenue. Other ways a company makes money can include affiliates and interest revenue.

These separate indexes provide historical and real-time insight into a business’s financial transactions.

Creating a chart of accounts

How a chart of accounts is created and organised will vary from company to company depending on:

  • How complex the financial domains are
  • How large the company is
  • The volume of goods and services being sold
  • The unique resources needed to execute sales

International corporations may require thousands of accounts to be indexed, while a small business typically needs 250 or less.

It’s up to the individual company to decide which financial groups to index and prioritise as well as maintain consistent and accurate data entry going forward. As this is a complex and demanding task, a bookkeeper can handle your accounts and free up your time.

Chart of accounts best practices

The best way to structure a chart of accounts is to use accounting software. This enables a simple and accurate system to be organised and maintained that can comply with industry standards.

It’s important that the COA you install remains in place for the long haul. Comparisons and analysis can only be done with like-to-like records, so any changes you make to indexing and recording may lead to limited data.

A bookkeeper can assist in identifying the key components needed to accurately cover the accounts your business needs so you can achieve a complete and accurate listing of each account in your general ledger.

 

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