What is a Chart of Accounts?

A company needs to maintain cash flow efficiently to run a business smoothly. This smooth flow of cash may require multiple accounts. If a company uses multiple accounts, it needs to maintain a record of all the transactions. For this purpose, the businesses use a chart of accounts. What is a chart of accounts, and why is it important for businesses? This article explains it all.

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What is a Chart of Accounts?

In the UK, a chart of accounts is a financial tool that comprises all the accounts a company uses to maintain a record of its transactions in its accounts ledger. The chart of accounts classifies all the company accounts by their types, for example, company assets such as stocks or shares, payables, equity, revenue generated in a year, and expenses of product making. Each class of accounts is given a unique code in the chart of accounts. The chart of accounts helps companies to trace and manage the cash flow efficiently, track the financial health of the company, and prepare future company policy according to the cash it has.

How Does a Chart of Accounts Work?

Enterprises, whether big or small, use a chart of accounts to manage and organise their finances. This chart of accounts is important for agreeing with investors or customers. Generally, before making an agreement, companies usually provide a clear view of their finances through a chart of accounts. This encourages customers and investors to trust the company and make future agreements. The chart of accounts provides a comprehensive view by separating expenditures, revenues, assets, and liabilities for the investors or customers. The chart of accounts also ensures that the company complies with the regulations set by the UK government.

Companies need a chart of accounts to maintain their finances, especially when it deals with multiple accounts. For example, if a user has multiple accounts of different classes in the same bank and he logs into an account online, on the account dashboard, he gets an overview of the balance in each account. In the same way, if a person uses account management software to keep all their accounts in a single place, such as Mint or Personal Capital, it is the online version of a chart of accounts that lets you view all assets and liabilities in one place.

In general, the chart of accounts has no single format. Usually, all the companies follow a general structure, which is important to serve the purpose of the chart of accounts. However, the final format of the chart of accounts depends on the company’s size and the requirement to display the account information.

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The Chart of Accounts Structure

This section describes what is the chart of accounts format and what it includes. The chart of accounts comes in handy when a company needs a comprehensive view of its assets, in other words, its financial ledger. The chart of accounts format is ordered such that balance sheet accounts are listed first, followed by accounts listed in the income statement.

The basic accounts of a company, such as assets, liabilities, shareholders’ equity, revenue, and expense, can be sliced into sub-accounts, for example, operating revenues, operating expenses, non-operating revenues, and non-operating losses. Some sub-accounts, such as operating revenues and operating expenses, can be further classified as business functions and company divisions.

For instance, the chart of accounts of a small company may list these sub-accounts under the primary assets, primary liabilities, and primary shareholders’ equity accounts

Assets

The asset account of a company includes the following items:

• Cash in the company account
• Savings account statistics
• Petty cash balance of the company
• Accounts receivable in the financial ledger of the company
• Undeposited funds of the company
• Inventory assets such as office equipment
• Prepaid insurance of the company
• Vehicles owned by the company
• Buildings where the company is operating

Liabilities

The company’s liabilities include the following:

• Company credit card amount
• Accrued liabilities of the company
• Accounts payable in the financial ledger of the company
• Payroll liabilities of the company
• Notes payable of the company

Shareholders’ equity

The shareholder’s equity comprises the following:

• Common stock
• Preferred stock
• Retained earnings

Account Identifiers

Account identifiers are the specific codes for each account assigned in the chart of accounts so that it is easier for the readers to locate what they are looking for. In general, each chart of accounts assigns specific codes, names, and short descriptions to accounts and sub-accounts. The identifiers help to organise many items from each transaction in the basic accounts, which would otherwise be all mixed up and jumbled.

Consider this example to have a clear idea of account identifiers.

An enterprise decides to code its assets from 100 to 199, liabilities from 200 to 299, and equity from 300 to 399, and hence the accounts are assigned specific codes. Furthermore, the accounts can be sliced further; for example, the current assets are listed from 110 to 119 and current liabilities from 210 to 219. The number of codes used for listing company accounts depends upon company size and the transactions it makes.

Most of the enterprises structure their chart if that expense information is listed separately by the department. Hence, all departments of the company, such as the sales department, engineering department, and accounting department, all have the same set of expense accounts. Examples of expense accounts include the cost of goods sold (COGS), depreciation expense, utility expense, and wage expense.

Conclusion

What is a chart of accounts? It is defined as the document that lists all the accounts operated by a company. The accounts are divided into assets and stockholders. These can be further subdivided into current accounts, expense liabilities, etc. There is no standard format for a chart of accounts. The size of the chart of accounts depends on the transactions made by the company and its size. The chart of accounts is important for the company as it provides a comprehensive view of the company’s financial ledger to the customers and investors, thus building their trust in the company.

Disclaimer: All the information provided in this article on what is chart of accounts, including all the text and graphics, is general in nature. It does not intend to disregard any professional advice.