Chart of Accounts: The Basics & Best Practices

Chart of Accounts: The Basics & Best Practices
Jake-Ballinger (compressed)

Jake Ballinger

FP&A Writer

Updated April 2022

đź“– minutes

Chart of Accounts: The Basics & Best Practices

You know that the Chart of Accounts is an important tool for any financial organization. 

It helps you find the necessary accounts and transactions you need, after all. 

So if you're looking to make sure you're following all the best practices for your chart of accounts, you're in the right place. 

Keep reading.

Key Takeaways

  • The chart of accounts (COA) is an index of all financial accounts in a company's general ledger. 
  • The leading digit on each account indicates what type of account it belongs to. 
  • There are 5 major account types in the COA: assets, liabilities, equity, income, and expenses. 
  • It's a best practice to never delete accounts in your COA until the end of the year.

Contents

  1. What is a Chart of Accounts?
  2. Chart of Accounts Best Practices
  3. Best Accounting Software to Standardize Your Chart of Accounts
  4. Conclusion

What is a Chart of Accounts (COA)? 

A chart of accounts is an index of all financial accounts in a company's general ledger. It's designed to make lookup and access easy.

The Chart of Accounts segments all the financial transactions a company conducted during a specific accounting period.

It replaces the filing cabinets of yore where back offices had intricate paper indexing systems for their transactions.

Why is the Chart of Accounts Important? 

The chart of accounts is essential to good bookkeeping. A standard chart of accounts makes it easy for anybody to come into your business and quickly understand your finances. 

As an index, the chart of accounts should make it easy to look up numbers, after all.

A well-designed chart of accounts will help you make better decisions, see where your finances are in the current moment, and make it easy to follow accounting and reporting standards.

Chart of Accounts Breakdown - Account Types

The chart of accounts lists accounts for the balance sheet and the income statement.

Therefore, there are five major account types in a Chart of Accounts: the three balance sheet accounts (assets, liabilities, and shareholders' equity) and the two income statement accounts (revenue/income and expenses).

Let's review each:

Asset Accounts

The assets account lists the assets that a company has. These include liquid assets like cash, inventory, and equipment, plus prepaid expenses like paid-in-full leases or money that is under contract to come in, like the accounts receivable.

A small corporation might include some arrangement of the following sub-accounts under their Assets:

  • Cash
  • Cash (payroll)
  • Savings account
  • Marketable securities
  • Petty cash balance
  • Accounts receivable
  • Undeposited funds
  • Inventory assets
  • Prepaid insurance
  • Prepaid expenses
  • Vehicles
  • Buildings
  • Equipment
  • Computers
  • Other assets

Asset account numbers usually begin with a 1.

Liabilities

The liabilities are any debt your company owes. These are the typical sub-accounts you'll seen under Liabilities:

  • Accounts payable
  • Company credit card(s)
  • Wages payable
  • Accrued liabilities
  • Taxes payable
  • Notes payable

Liability account numbers usually begin with a 2.

Stockholders' Equity

Equity is what's left after subtracting your company's liabilities from its assets. The simplest Chart of Accounts will only have three sub-accounts listed here: 

  • Common stock
  • Preferred stock
  • Retained earnings

Equity account numbers usually begin with a 3.

Income/Revenue

Revenue is the money your business brings in through sales or investments. 

  • Investment income
  • Sales
  • Sales returns and allowances
  • Fees earned

Income or Revenue account numbers usually begin with a 4. 

Expenses

Finally, we come to expenses. This is all the non-debt money that you need to spend in order to keep your business running.

  • Cost of goods sold (COGS)
  • Advertising expenses
  • Bank fees
  • Depreciation expenses
  • Payroll Tax expenses
  • Rent expenses
  • Supplies expenses
  • Travel expenses
  • Utilities expenses
  • Wages expenses
  • Other expenses

Expense account numbers typically begin with a 5.

Quick Note on Reference Numbers

The leading digit on each account number denotes its type.

Assets - 1

Liabilities - 2

Equity - 3

Income/Revenue - 4

Expenses - 5, 6, and 7

However, most accounting software will automatically assign numbers for you, so you don't need to worry about creating them yourself. You just need to know the code.

For reference, here's a more granular breakdown of these different numbers in a standard chart of accounts:  

1000 Assets

  • 1200 Receivables
  • 1300 Inventories
  • 1400 Prepaid expenses & other current assets
  • 1500 Property plant & equipment
  • 1600 Accumulated depreciation & amortization
  • 1700 Non-current receivables
  • 1800 Intercompany receivables
  • 1900 Other non-current assets

2000 Liabilities

  • 2100 Payables
  • 2200 Accrued compensation & related items
  • 2300 Other accrued expenses
  • 2500 Accrued taxes
  • 2600 Deferred taxes
  • 2700 Long-term debt
  • 2800 Intercompany payables
  • 2900 Other non-current liabilities

3000 Owner equities

4000 Revenue

5000 Cost of Goods Sold

6000-7000 Operating Expenses

Example Chart of Accounts

This is an example COA for a fictional SaaS company:

 

Number

Account Description

Account Type

Statement

1010

Cash

Assets

Balance Sheet

1020

Savings

Assets

Balance Sheet

1030

Accounts Receivable

Assets

Balance Sheet

1080

Computers

Assets

Balance Sheet

2010

Accounts payable

Liabilities

Balance Sheet

2011

Credit cards

Liabilities

Balance Sheet

2014

Wages payable

Liabilities

Balance Sheet

2020

Accrued liabilities

Liabilities

Balance Sheet

2050

Taxes payable

Liabilities

Balance Sheet

2060

Notes Payable

Liabilities

Balance Sheet

3010

Preferred Stock

Equity

Balance Sheet

4010

Sales

Income

Income Statement

5000

Advertising Expenses

Expenses

Income Statement

5014

Wages Expenses

Expenses

Income Statement

5050

Payroll Tax Expenses

Expenses

Income Statement

How does the Chart of Accounts work? 

The chart of accounts follows a principle known as double-entry accounting. Here's what this means in practice: 

Say you buy a new employee laptop for $800. You'd debit $800 from the appropriate Assets account (in this case, Cash) and credit $800 to the appropriate Assets account (in this case, Computers).

In this way, the chart of accounts stays balanced. 

Chart of Accounts Best Practices

In this section, you'll learn about a few best practices for managing your chart of accounts.

Account Descriptions

The Chart of Accounts should have a short description next to each account name and account type to help people avoid confusing it with another account. 

Usually, this is the same as a good name—names like "Accounts Receivable," "Credit Card (Operations)," and "Fees Earned" all have the appropriate level of detail.  

Don't delete accounts until the end of the year

It's best practice to wait until the end of the year—after a close—to merge, rename, or delete accounts.

That said, you should add new accounts as the need arises.

Don't create too many accounts

Your Chart of Accounts is an index, but it's also meant to be a quick lookup table. You don't need to create separate accounts for every single transaction, utility, or sale. 

Be smart about lumping similar items together. This keeps you from creating too many specific accounts, leading to an annoying cleanup process at the end of the year.  

Be consistent with your COA

It's best if your COA doesn't dramatically change year over year. 

Why? 

Because you want to make it easy to compare performance of different accounts over time. If you're splicing, merging, and deleting accounts, that information can get lost and you'll lose valuable financial data. 

...or you'll spend too much time reconstructing old accounts, which can lead to mistakes and inaccurate data.

If you need another reason, look no further than the GAAP (Generally Accepted Accounting Principles) set forth by the FASB (Financial Accounting Standards Board), which state regularity and consistency as the first two rules.

Consolidate at the end of the year

Take the end of the year as an opportunity to consolidate and simplify your COA. 

Remember: brevity is elegance. You might be worried that a shorter chart of accounts obfuscates important details, but in our experience, that's unlikely to happen with a good naming system. 

Best Accounting Software to Standardize Your Chart of Accounts

While Excel and Google Sheets are fine for beginning businesses, at a certain point, you need to move to a dedicated piece of accounting software. 

Accounting software handles your chart of accounts for you, which makes it super simple and easy to set up.

Here are some of our recommendations: 

1. Quickbooks

Quickbooks from Intuit is more than a piece of accounting software: it's an ERP trusted by businesses of all sizes and across industries. 

We like Quickbooks in particular because it integrates nicely with Cube, meaning you can keep your data stored in and managed by Quickbooks and import it to Excel or Google Sheets when you're ready to do your strategic finance work. 

It's a win/win. 

2. Sage Intacct

Like Quickbooks, Sage Intacct is an ERP trusted by all kinds of businesses. 

Quickbooks is more lightweight than Sage Intacct. We find that most enterprise companies prefer a bigger solution like Sage Intacct while companies who value leanness and agility flock to Quickbooks. 

Sage Intacct also integrates with Cube, so all the aforementioned benefits still apply. 

3. NetSuite

Like Sage Intacct, NetSuite is more than simply accounting software: it's an enterprise-level, cloud-based ERP.

We like NetSuite because it's a single platform for multiple services: just like how marketers like HubSpot because it consolidates several independent tools in one place, financial professionals like NetSuite because it does accounting, works as a CRM, and allows for ecommerce transactions. 

NetSuite also integrates with Cube, so you can keep your accounting and FP&A separate. We call that a win.

Conclusion

Now you know all about how to create a chart of accounts. 

You also have a solid set of best practices for managing your chart of accounts. 

So we're curious—

What did you learn about the best practices for your chart of accounts? 

Share this post on LinkedIn and tag us to keep the conversation going.

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