Each time you add or remove an account from your business, it’s important to record it in your books. The chart of accounts (COA) helps you do just that.
Read on to learn about the importance of a chart of accounts and how to create one to keep track of your business’s accounts.
A chart of accounts, or COA, is a complete list of all the accounts involved in your business’s day-to-day operations. Your COA is useful to refer to when recording transactions in your general ledger.
Typically, a chart of accounts has four account categories:
Each category includes specific accounts for your business. For example, a business vehicle you own would be recorded as an asset account.
Your asset accounts could include anything you own that has value, such as:
Your liability accounts include things like:
Current liabilities are classified as any outstanding payments that are due within the year, while non-current or long-term liabilities are payments due more than a year from the date of the report.
When entering a loan into your company’s chart, follow these tips:
Income tends to be the category that business owners underutilise the most. Below are the most common types of revenue or income accounts:
Most new owners start with one or two broad categories, like “sales” and “services.” While some types of income are easy and cheap to generate, others require considerable effort, time, and expense. It may make sense to create separate line items in your chart of accounts for different types of income.
Expense accounts represent any money that you’ve spent. For instance, if you rent, the money moves from your cash account to the rent expense account. Expense accounts allow you to keep track of money that you no longer have.
Below are more examples of expense accounts to your business may use:
It’s also a good idea to break up expenses into separate accounts. For instance, if you ship a lot of products, you may want to track your costs from different shipping carriers separately. Within each line account, you can create sub-categories for the various expenses associated with each carrier.
You can set up a chart of accounts in three steps:
The account name is the given title of the business account you’re reporting on (for example, bank fees, cash, taxes, etc.).
Account numbers are the numbers assigned to each account name. The most common number sequences for each account are:
Each of your account names should be assigned an account type or general ledger. Choose from the four main account types: asset, liability, income, and expense.
Below is an example of a chart of accounts with the necessary components. When you’ve set up your chart, you can then begin adding specific account names and the account category they’re associated with.
| Account # | Account Name | Account Category |
|---|---|---|
| 2122 | Bank Fees PayPal Fees | Liabilities |
| 6122 | Rent Expense Building rent Equipment rent | Expenses |
| 4122 | Cash | Income |
| 2123 | Mortgages | Liabilities |
| 2124 | Taxes | Liabilities |
| 1122 | Cash | Assets |
| 6123 | Wages | Expenses |
When setting up your line items for the first time, keep it simple. Make sure that your line items have titles that make sense to you and your accountant. Use straightforward titles like “bank fees,” or “bottling equipment.”
As time goes by, you may find yourself wanting to create a new line item for each transaction. However, doing so could litter your company’s chart and make it confusing to navigate. Instead, take advantage of your accounting software’s sub-accounts.
For instance, imagine you need to create a new account for “PayPal fees.” Instead of creating a new line on your chart of accounts, you can create a sub-account under “bank fees.” Similarly, if you pay rent for a building or piece of equipment, you might set up a “rent expense” account with sub-accounts for “building rent” and “equipment rent.”
Add an account statement column to your COA to record which statement you’ll be using for each account–cash flow, balance sheet, or income statement. For example, balance sheets are typically used for asset and liability accounts, while income statements are used for expense accounts.
Your chart of accounts is a living document for your business and because of that, accounts will inevitably need to be added or removed over time. The general rule for adding or removing accounts is to add accounts as they come in, but wait until the end of the year or quarter to remove any old accounts.
QuickBooks Online automatically sets up a chart of accounts for you based on your business entity with the option to customise it as needed. Find out more about how QuickBooks Online can help you save time, stay on top of your finances and grow your business.
QuickBooks Online automatically sets up a chart of accounts for you based on your business entity with the option to customise it as needed. Find out more about how QuickBooks Online can help you save time, stay on top of your finances and grow your business.
TAKE A NO-COMMITMENT TEST DRIVE
Our customers save an average of 9 hours per week with QuickBooks invoicing*
By entering your email, you are agree to our Terms and acknowledge our Privacy Statement.
Intuit helps put more money in consumers’ and small businesses’ pockets, saving them time by eliminating work, and ensuring they have confidence in every financial decision they make.
3x WeMoney Award Winner
