The chart of accounts (CoA) is a listing of all the financial accounts used in the general ledger of an organization. The CoA is used by the accounting software to aggregate information into the entity’s financial statements. The CoA usually includes the name, description, and identification code of each account.
It is an essential tool for organizing and managing the financial information and reporting of an organization. It reflects the nature, structure, and operations of the organization, as well as its strategy, goals, and objectives.
In this guide, you will learn about the following topics related to the CoA:
- The benefits of having a well-designed CoA
- The identification and numbering system of the CoA
- The contents and types of accounts in the CoA
- The guidelines for developing a CoA for a small and medium enterprise (SME)
- The industry leading practices for designing and maintaining a CoA
- The latest trends and statistics on the CoA
- The common information model (CIM) and the finance data model (FDM) for the CoA
- The governance and control of the CoA
- The steps to create a CoA
Benefits of the Chart of Accounts
Some of the benefits of having a well-designed CoA are:
- It provides a consistent and standardized way of categorizing and recording financial transactions across the organization.
- It facilitates the preparation and analysis of financial reports, both for internal and external purposes.
- It enables the comparison and consolidation of financial data across different entities, divisions, or locations within the organization.
- It supports the implementation of internal controls and audit procedures to ensure the accuracy and reliability of financial information.
- It enhances the efficiency and effectiveness of the accounting processes and systems.
Identification and Numbering System of the Chart of Accounts
The CoA is usually identified by a numbering system that assigns a unique code to each account. The numbering system can vary depending on the size, nature, and complexity of the organization, but it typically follows a logical and hierarchical structure. For example, a common numbering system for a large organization is:
- Assets: 1000-1999
- Liabilities: 2000-2999
- Equity: 3000-3999
- Revenue: 4000-4999
- Expenses: 5000-5999
The numbering system can also include subcategories or segments to provide more details or dimensions for each account. For example, an asset account can be further divided into current and non-current assets, or a revenue account can be further divided into product lines or regions.
Contents and Types of Accounts in the Chart of Accounts
The CoA contains all the accounts that are relevant and necessary for the organization’s financial reporting and management. The CoA can vary depending on the industry, business model, and accounting standards of the organization, but it generally includes the following types of accounts:
- Balance sheet accounts: These are the accounts that reflect the financial position of the organization at a given point in time. They include assets, liabilities, and equity accounts.
- Income statement accounts: These are the accounts that reflect the financial performance of the organization over a period of time. They include revenue and expense accounts.
- Other accounts: These are the accounts that are not directly related to the balance sheet or income statement, but are still important for the organization’s accounting purposes. They include contra accounts, memorandum accounts, and statistical accounts.
Guidelines for Developing a Chart of Accounts for a SME
Some of the guidelines for developing a CoA for a SME are:
- Start with a basic and simple CoA that covers the essential accounts for the organization’s financial reporting and management. Avoid creating too many or too few accounts that can cause confusion or inefficiency.
- Use a clear and consistent naming and numbering system for the accounts that reflects the organization’s structure and operations. Use descriptive and meaningful names and codes that can be easily understood and recognized by the users of the CoA.
- Review and update the CoA periodically to ensure that it reflects the changes and needs of the organization. Add, modify, or delete accounts as necessary to keep the CoA relevant and accurate.
- Seek professional advice or guidance from an accountant or a consultant if needed to ensure that the CoA complies with the applicable accounting standards and regulations.
Industry Leading Practices for Designing and Maintaining a CoA
Some of the industry leading practices for designing and maintaining a CoA are:
- Align the CoA with the organization’s strategy, goals, and objectives. Ensure that the CoA supports the measurement and reporting of the key performance indicators (KPIs) and metrics that are important for the organization.
- Adopt a common and standardized CoA across the organization to enable the integration and consolidation of financial data from different sources and systems. Use a common information model (CIM) or a finance data model (FDM) to define and govern the CoA across the organization.
- Leverage the capabilities and features of the accounting software or system to optimize the CoA design and functionality. Use the software or system to automate, validate, and reconcile the financial transactions and reports based on the CoA.
- Implement a robust and effective governance and control framework for the CoA. Establish clear roles and responsibilities, policies and procedures, and approval and review processes for the CoA management and maintenance.
Common Information Model and Finance Data Model for the CoA
The CIM and the FDM are two different approaches to designing and maintaining a CoA that can support the financial reporting and management needs of an organization. The CIM is a more generic and flexible model that defines the common data elements or dimensions that are used across the enterprise, such as business unit, product, customer, location, etc. The FDM is a more specific and tailored model that defines the financial accounts and their attributes, such as account type, balance type, currency, etc.
The CIM and the FDM can work together to create a robust and scalable CoA that can enable the integration and consolidation of financial data from different sources and systems. The CIM can provide the context and granularity for the financial data, while the FDM can provide the structure and consistency for the financial data. The models can also facilitate the alignment of the CoA with the organization’s strategy, goals, and objectives, as well as the compliance with the applicable accounting standards and regulations.
To establish, develop, and manage the CoA by the CIM and the FDM, some of the steps involved are:
- Define the business requirements and objectives for the CoA, such as the level of detail, frequency, and scope of the financial reporting and management.
- Identify and analyze the current state of the CoA, such as the existing data elements, accounts, systems, processes, and issues.
- Design and document the future state of the CoA, such as the proposed data elements, accounts, systems, processes, and benefits.
- Implement and test the new CoA, such as the migration, validation, and reconciliation of the financial data and reports.
- Monitor and maintain the new CoA, such as the governance, control, and update of the financial data and reports.
More Information of Chart of Accounts
- How to redesign finance data with a finance information model: This article from Deloitte UK explains the components, challenges, and benefits of a well-designed finance data model, and provides some tips and best practices for developing and implementing a new model.
- Strategic Chart of Accounts Design: This article from Deloitte US describes the importance, objectives, and guidelines of a strategic CoA design, and provides some examples and case studies of successful CoA transformations.
Governance and Control of the CoA
These are the processes and mechanisms that ensure the quality, consistency, and integrity of the CoA and the financial data and reports based on it. Governance and control involve the following aspects:
- Roles and responsibilities: These define who is accountable and responsible for the creation, maintenance, approval, and review of the CoA and its related policies and procedures. Typically, the roles and responsibilities are assigned to different stakeholder groups, such as the Controller’s Office, the Finance and Accounting Department, the Business Technology Department, and the Business Units.
- Policies and procedures: These define the rules and guidelines for the design, implementation, and update of the CoA and its related systems and processes. They also define the standards and criteria for the data quality, security, and compliance of the CoA and its related financial data and reports.
- Approval and review processes: These define the steps and workflows for the approval and review of the CoA and its related changes and requests. They also define the frequency and scope of the approval and review activities, as well as the documentation and communication requirements.
The governance and control of the CoA are essential for ensuring the accuracy, reliability, and timeliness of the financial information and reporting of the organization. They also help to prevent and detect errors, fraud, and risks related to the CoA and its related financial data and reports.
Industry Information of CoA
- Chart of Accounts Governance: This article from EY provides a framework and best practices for establishing and maintaining a strong governance and control environment for the CoA.
- Chart of Accounts: Best Practices for Design and Governance: This article from Oracle provides some insights and recommendations for designing and governing a CoA that can meet the changing needs and expectations of the organization.
Steps to Create Chart of Accounts
To create a CoA, you need to follow these steps:
Step 1:
Use the main account types. The main account types are the five categories that are universal to all businesses: assets, liabilities, equity, revenue, and expenses. These account types help you organize your financial transactions by category.
Step 2:
Create your business’s accounts. The accounts are the specific names and descriptions of the financial items that you record in your general ledger or accounting software. The accounts should reflect the nature, structure, and operations of your business. For example, you may have accounts for cash, accounts receivable, equipment, sales, cost of goods sold, etc.
Step 3:
Assign account numbers to your accounts. The account numbers are the four-digit codes that you assign to each account to identify and classify them. The account numbers should follow a logical and hierarchical structure, such as:
- Assets: 1000-1999
- Liabilities: 2000-2999
- Equity: 3000-3999
- Revenue: 4000-4999
- Expenses: 5000-5999
Step 4:
Keep your chart of accounts organized. To keep your chart of accounts organized and useful, you should follow some best practices, such as:
- Start with a basic and simple chart of accounts that covers the essential accounts for your business. Avoid creating too many or too few accounts that can cause confusion or inefficiency.
- Use a clear and consistent naming and numbering system for your accounts that reflects your business’s structure and operations. Use descriptive and meaningful names and codes that can be easily understood and recognized by the users of the chart of accounts.
- Review and update your chart of accounts periodically to ensure that it reflects the changes and needs of your business. Add, modify, or delete accounts as necessary to keep your chart of accounts relevant and accurate.
- Seek professional advice or guidance from an accountant or a consultant if needed to ensure that your chart of accounts complies with the applicable accounting standards and regulations.
Additional Industry Information of CoA
- How to Make Chart of Accounts: Tips for Small Business: This article from FreshBooks explains the components, benefits, and guidelines of a chart of accounts for small businesses.
I hope this guide helps you understand the chart of accounts in the accounting department. If you have any further questions, please feel free to ask me.