Full-Form COA (Chart of Account)

How does it Work?

  • This is created in alignment with the business needs. On the one hand, it can contain complex intersections of rows and columnsRows And ColumnsA cell is the intersection of rows and columns. Rows and columns make the software that is called excel. The area of excel worksheet is divided into rows and columns and at any point in time, if we want to refer a particular location of this area, we need to refer a cell.read more; on the other hand, it can have a straightforward set of accounts. In any case, it should be robust, definitive, and purposeful.A complex Chart of AccountsChart Of AccountsA chart of accounts (COA) lists all the general ledger accounts that an organization uses to organize its financial transactions systematically. Every account in the chart holds a number to facilitate its identification in the ledger while reading the financial statements.
  • read more may have more features such as allotment of accounting numbers, priority, and detailed information. However, in general, they use a general ledgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations.
  • read more for their compilation.A chart of account samples contains at least three sections: Account name, type of account, and description.The specificity of business units numbers these departments accounts in that order. In the table below, taking account number 103001, the first two digits may signify the department while the rest four denote the account category. Observe the specificity used as a certain number of system codes.

Company XYZ uses the following sample of COA:

Example

Suppose a company buys $1 million worth of land for its manufacturing business. The accounts department must make journal entries to keep records and maintain financial guidelines for the company. The following will be the entry in the books of accounts:

On the date, dd/mm/yyyy, account number 2003, Plant property and equipmentPlant Property And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more account, debited with $1 million while account number 1001 credited with $1 million. Notice that the two accounts’ information can be fetched from the Chart of Accounts below.

Types

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  • Operating: This tracks operative accounts, i.e., regular transaction accounts.Business: Which uses all accounts relevant to the business or corporate function.Country-Specific: Those who operate based on different accounting standards or legal standards of countries.

Importance

  • This is as important as any other element in a business. It serves the purpose of mapping any accounts related to the business. It also helps businesses make better decisions and follow accounting and reporting standards.Assume a big supermarket with hundreds of SKUs on sale and thousands of products on its shelves. The supermarket owner’s efficient management is a function of how well he knows his products’ demand and supply profile.For this, he maintains an Excel file with definite segregation of the SKUs and products. Whenever any product is sold, an Excel entry is made to reorder it. Likewise, a business maintains all its accounts of financial nature with a chart of accounts to make bookkeepingBookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments.read more efficient.

Difference Between COA and Ledger

  • A LedgerLedgerLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read more or General LedgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations.
  • read more is the actual book of accounts used for making accounting entriesAccounting EntriesAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more. In contrast, a Chart of Accounts is simply a listing of all accounts related to a company’s business.A Ledger is made by summarizing all available journals and then further accounting books like a trial balanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more. On the other hand, it is an independent record used for further correspondence and recordkeeping.Furthermore, a Chart of Accounts can be used by multiple companies for their record. At the same time, Ledger is specific to a company because of its inherent nature of keeping transactional business entries.

Benefits

  • A good COA is always well-prepared in its initial stages and serves the purpose by further improvisations until it addresses business needs.It reduces the effort and time to consolidate information on management requests in the future.It can also be used in benchmarking business units and reduces procedures related to reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more.

Limitations

  • These are simple and serve no complex requirements of the management.It has limited checks and balances, as any error in making a chart of accounts will not be determinable by linkages or checks.Even with the limited purpose that COAs serve, companies must follow guidelines set out by the US GAAP (Generally Accepted Accounting PrinciplesGenerally Accepted Accounting PrinciplesGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more) and FASB (Financial Accounting Standards Board).It may not be beneficial for small organizations or sole proprietorships because of the disproportionate costs and labor involved in its maintenance.

Conclusion

  • This is very helpful for a business in systematically segregating all its accounts. It helps company management and all stakeholders, especially supply chain partners, business analysts, and investors.This is adjustable per business requirements; however, it requires expertise and effort to keep consistent records in a chart of accounts. Any discrepancy can give the wrong picture of business health. In the modern world of high-tech business management, software and systems are careers, and businesses still owe a great deal of attention and care to handling the most basic elements like the chart of accounts.
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