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Chart of accounts: Definition, how to set up, and examples
accounting

Chart of accounts: Definition, how to set up, and examples

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.

What is a chart of 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:

  • Asset accounts
  • Liability accounts
  • Income accounts
  • Expense accounts

Each category includes specific accounts for your business. For example, a business vehicle you own would be recorded as an asset account.

The four main account types in a chart of accounts list

1. Asset accounts

Your asset accounts could include anything you own that has value, such as:

  • Buildings
  • Land
  • Equipment
  • Vehicles
  • Valuables
  • Inventory
  • Cash
  • Accounts receivable
  • Notes receivable

2. Liability accounts

Your liability accounts include things like:

  • Accounts payable or bills
  • Payroll taxes
  • Income taxes payable
  • Bank loans
  • Credit card balances
  • Mortgages
  • Deferred tax liabilities
  • Personal loans

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:

  • Log just the principal loan amount and exclude the interest owed.
  • When you make each monthly payment, enter the payment in your accounting system.
  • Split the payment into an amount subtracted from what you owe, and an amount of interest paid, which should go into an expense account.

3. Income accounts

Income tends to be the category that business owners underutilise the most. Below are the most common types of revenue or income accounts:

  • Sales income
  • Rental income
  • Dividend income
  • Contra income

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.

4. Expense accounts

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:

  • Cost of sales
  • Advertising expense
  • Interest expense
  • Depreciation expense
  • Salaries or wages
  • Interest expense
  • Depreciation expense

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.

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How to set up the chart of accounts

You can set up a chart of accounts in three steps:

1. Create business account names

The account name is the given title of the business account you’re reporting on (for example, bank fees, cash, taxes, etc.).

2. Assign account numbers to business accounts

Account numbers are the numbers assigned to each account name. The most common number sequences for each account are:

  • Assets: 1,000 to 1,999
  • Liabilities: 2,000 to 2,999
  • Income: 4,000 to 4,999
  • Operating expenses: 6,000 to 7,999

3. Organise account names into one of the four account category types

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.

Chart of accounts example

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

Tips for keeping your chart of accounts organised

Use simple account names

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.”

Create sub-accounts

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 financial statements

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.

Track account movement

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.

How accounting software can help manage your chart of 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.

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