Key takeaways
- A chart of accounts (COA) is an organized listing of all the financial accounts a business uses to record and categorize its transactions.
- The COA includes both balance sheet and profit and loss (P&L) accounts.
- The COA lists the available accounts, while the general ledger records what happened in those accounts over a period.
- Accounts are typically grouped into assets, liabilities, equity, revenue and expenses, with sub-accounts beneath each category.
Introduction to a chart of accounts (COA)
A chart of accounts (COA) is an organized listing of all the financial accounts a business uses to record and categorize its transactions. It forms the backbone of an accounting system, helping businesses consistently classify every financial transaction and produce accurate financial statements.
The COA lists all of a company’s accounts, including both balance sheet and profit and loss (P&L) accounts. Every transaction is recorded by debiting and crediting multiple accounts in the form of journal entries in the company's general ledger (GL). The COA is the blueprint for a business’s accounting system, while the GL is the record of all financial transactions. The COA tells you what accounts are available, while the general ledger shows what happened in those accounts over a given period.
How a chart of accounts works
The purpose of a COA is to help businesses streamline their bookkeeping process, ensure consistent record-keeping, and generate reliable financial reports. This requires the COA to have a clear, well-organized structure.
To this end, here are some key points about how a COA should ideally function:
- Organization: The COA typically groups accounts into major categories such as assets, liabilities, equity, revenue, and expenses.
- Structure: Within each major category, accounts can be broken down into sub-accounts (for example, under “Expenses,” you might have “Rent Expense,” “Utilities,” “Salaries,” etc.).
- Identification: Each account in a chart of accounts is usually assigned a unique code or number, helping accountants quickly identify and locate specific transactions.
- Customization: While there are best practices for creating a COA, the exact layout and level of detail differ depending on the company’s size, industry, and reporting requirements.
Common account categories
A COA is intended to be a comprehensive listing of all of a company's accounts, with every account typically belonging to a specific category. Below are some common examples.
Equity and subordinated debts
- Equity is the amount of money invested by a company’s shareholders to finance the company’s activities.
- Subordinated debts are the amount of money lent by a third party to a company to finance its activities. In the event of the dissolution of a company, these third parties are reimbursed before the shareholders.
Fixed assets
Fixed assets are tangible (i.e., physical) items or properties that a company purchases and uses to produce its goods and services. Fixed assets are long-term assets, meaning that they have a longevity of more than one year. This asset type can include properties, plants, and equipment (also known as “PP&E”) and is recorded on the balance sheet with that classification.
Current assets and liabilities
- The current assets account is a balance sheet line item that accounts for all company-owned assets that can be converted to cash within one year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets.
- Current liabilities are a company’s short-term financial obligations due within one year. An example of a current liability is money owed to suppliers in the form of accounts payable.
Bank and cash accounts
- A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded.
- A cash account, or cash book, may refer to a ledger in which all cash transactions are recorded. The cash account includes both the cash receipts and the cash payment journals.
Expenses and income
- An expense is the costs of operations a company bears to generate revenues. It is simply defined as the cost one is required to spend on obtaining something. Common expenses include supplier payments, employee wages, factory leases, and equipment depreciation.
- Income generally refers to the amount of money, property, and other transfers of value received over a set period of time in exchange for services or products.
How Atlar can help with accounting
Streamlined accounting processes are central to managing a company's finances efficiently. The Atlar platform helps you modernize accounting processes with direct connections to over 40 major banks and counting, plus a number of key payment providers, expense management tools, and more.
Atlar customers can reliably connect any number of banks, PSPs, and other tools to their ERP, streaming data and payments back and forth in real time. Our native integrations with ERP systems like Oracle NetSuite and Microsoft Dynamics 365 remove the need to navigate between multiple systems, transfer files, and manually enter payment details. Plus, you can leverage immutable audit trails for a detailed record of all actions, ensuring full transparency.
