Most entrepreneurs know how crucial it is to keep track of the money that flows in and out of their business. Using a chart of accounts could be beneficial in this instance.
What is a Chart of Accounts?
Investopedia defines a chart of accounts or COA as “an index of all the financial accounts in the general ledger of a company.” The COA enables businesses to see their accounts in one place and break down every transaction made at a specific time into subcategories.
The primary account types in a COA are revenue, expenses, liabilities, assets and equity.
The charts of accounts for every business will vary. For example, a COA of a software business will be different from a cafe. Small businesses may not have as many accounts to track compared to a multinational firm, but with a COA, entrepreneurs can gain a quick overview of their current financial health.
How is a Chart of Accounts helpful for you?
Keeping a close eye on your firm’s financial health isn’t always straightforward. Unless you are very familiar with the accounts in your books, a COA will help map them out.
With a well-design chart of accounts, you can effectively categorise critical reports in the business, making it easy to identify what transactions are recorded. By creating a well-designed COA, you will get a clear snapshot of your company’s financial standing. It will make it easier to produce financial reports and ultimately help you make informed decisions.
Balance Sheet Accounts
There are three types of balance sheet accounts: asset accounts, liability accounts and equity accounts. These three accounts are required to create a balance sheet.
- Asset accounts – a record of any resource owned by the business, physical or non-physical, that provides value to the company. Example of assets is computer equipment, cash, and accounts receivable.
- Liability accounts – this is a record of amounts that a company owes. For example, the payments you owe to suppliers, bank loans, and payroll liabilities.
- Equity accounts – represents what’s left of the company after subtracting all of the business’ liabilities from its assets. These accounts measure how valuable the company is to its owners and shareholders.
Income Statement Accounts
These accounts generate another major financial statement, which is the income statement.
- Revenue accounts – this reflects the income a company gains during a specific period. Some examples include the sale of goods or services, interest revenue and interest income.
- Expenses accounts – these display all the cash and resources that are spent in the process of creating revenue. Examples of these include wages, rent and advertising.\
Also Read: Understanding Your Profit and Loss Statement
Chart of Accounts Reference Numbers
The accounts in a COA are organised based on a numerical system, with each significant category beginning with a specific number. The subcategories in that main category will then start with the same number as well.
As an example, assets accounts would start with the digit 1; inventory accounts would be labelled 101, cash accounts 102 and so forth.
If you need help creating an effective COA for your business, you can partner with a VCFO or a financial advisor to help you map out your accounts.
Get in touch with us if you want to know how we can help you.