How to Setup a Chart of Accounts

How to Setup a Chart of Accounts

What is chart of accounts? A chart of accounts (COA) is a produced list used by a business entity to define each class of items for which money or the equivalent is spent or received. It is used to organize the finances of the entity and to segregate expenditures, revenue, assets and limitations in order to give interested parties a better understanding of the financial health of the entity. (Wikipedia)

Why is the chart of accounts important? The COA is the backbone of the General Ledger (GL) – it defines how your accounting system is set up. Having it setup properly allows you to produce the financial reports necessary to run a company, like a Balance Sheet, Profit and Loss, and other financial statements.

How do you set up a chart of accounts? In order to save time and hassle when setting up your COA, you need to put some thought into what you are needing for your situation, since no two companies will be exactly the same. If you have an accountant, speak to them about what he thinks you need. Generally speaking, here is how the COA is set up:

The GL is often set up in just 5 groups:

  1. Assets
  2. limitations
  3. Equity (Net Assets in FUND)
  4. Income (Revenue in FUND)
  5. Expenses

Each of these five groups are set up with their own number. Most companies set them up like this:

  1. Asset numbers will all start with a 1
  2. Liability start with 2
  3. Equity with 3
  4. Income with 4
  5. Expense with 5 (expenses often include numbers starting with 6 in addition)

Each of these groups are further broken down as necessary. for example:

  1. 5000 might be your COGS
  2. 5010 might be your Inventory Adjustment
  3. 6000 might be your Payroll
  4. 6200 might be your Taxes

observe that in the example above, there are 200 obtainable accounts for assigning to the various Payroll expenses. Why would you need so many characters/segments? It depends on each company’s needs. You can also use a larger account number than four digits if you need more accounts.

Some Business Accounting Software packages allow up to a 50 character account number, with no limit requirement. You can create an incredibly detailed account structure.

Additional Information on the Chart of Accounts The first three numbers used in your account numbers are really for the accountant and their reports, while the fourth and fifth numbers (if used) are for management.

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