A chart of accounts (COA) gives you a better understanding of the financial health of your business and helps you comply with financial reporting standards. As such, it’s critical for any business, large or small, and properly managed can be a really useful tool.
A COA is basically a listing of all the accounts you have. Every financial transaction you make is assigned to an account – for example, to a cash account which records transactions involving cash or to a sales account which records all your sales.
Businesses sometimes have different accounts for each department: marketing, production, HR and so on, covering expenses and salaries. A large organisation may have thousands of accounts in its chart. A small business may only have a dozen or so.
So here are some tips to set up your COA and to run it smoothly.
1. Organise Your Chart in Groups
A common split in a COA is between balance sheet accounts (assets, liabilities, equity) and income statement accounts (operating revenues, operating expenses, non-operating revenues and gains, non-operating expenses and losses). This structure may work for your business or you could split it down further if you like. You’re free to structure it to meet your needs.
2. Decide on the Level of Detail
How much detail you have in your categories and subcategories will affect how easily and meaningfully you can generate reports from your COA. So think about which data you might want to compare. What do you need to know at the end of the month, at the end of the quarter and to file your BAS?
For example, if you’re an IT provider that sells computer products but also sells support and services, you might want to group these functions accordingly. Then you can compare how the different parts of your business are performing.
3. Have a Numbering System
As well as each account title – Cash, Accounts Receivable, Supplies, etc. – assign each one with a number. This makes your COA easier to organise and avoids confusion, for example between two accounts with similar names. The numbers help with grouping, which allows you to sort your accounts numerically. For example, everything related to your marketing department might start with 120xx and all your liability accounts might start with 240xx.
4. Use Accounting Software
Of course you can set up your COA in Excel, but it’s a lot of work and you have less flexibility with a manual system, not to mention a strong likelihood of errors. On the other hand, professional accounting software does a lot of the heavy lifting for you. For example, it can generate a suggested COA, tailored to your business type, which you can then adapt further to suit your requirements. The software also provides a drop-down list of your accounts so you can select the appropriate one for each transaction.
5. Do Your Research
While you can always change and edit your COA at any time, it’s much easier getting it right from the start by doing some basic research. There are many industry-specific COAs available, as well as suggestions for different types of businesses. Remember that your small business could one day be a bigger one, so look for a structure that gives you flexibility.
Some countries, such as France and Sweden, have standard COAs. While these may not be legal requirements, they are commonly used by businesses in those jurisdictions. Australia has a National Standard Chart of Accounts (NSCOA), predominantly for not-for-profit organisations, which any business can use or adapt.
Once you’ve done the hard work setting up your COA – or relatively easy work if accounting software is giving you a leg-up – you’ll find it much easier to generate an overview of your business, get regular reports and determine where the strong points and the weak links are. You can then turn your data into insights that will help you run and grow your business.