Chart of accounts in business accounting
Learn about charts of accounts in business accounting and see examples of such charts and account numbering.
1. Definition of a chart of accounts in accounting
Chart of accounts (COA) is the numerical list of all accounts used by a business.
Accounts are usually numbered using three-, four-, or five-digit numbers (for example, 100, 1000, 00-010). Complex businesses may require a chart of accounts with accounts numbered using more than five digits. Accounts listed in a chart of accounts are used to set-up the General Ledger as well as generate a balance sheet and income statement. Charts of accounts are usually customized to meet the needs of a certain type of business.
The major divisions of a chart of accounts and an example of corresponding four-digit numbers are listed below:
- 1000-1999: Assets
- 2000-2999: Liabilities
- 3000-3999: Capital (Equity)
- 4000-4999: Revenues
- 5000-5999: Cost of goods sold
- 6000-6999: Expenses
- 7000-9999: Non-operating income or expenses
Note that a chart of accounts does not have to have the same sequence as the one listed above. While balance sheet accounts usually (not always) have account codes within the ranges shown in our example (i.e., assets start with number 1; liabilities – with 2; and equity – with 3), income statement accounts can be organized in many ways in order to meet specific needs of a company.
2. Balance sheet accounts within a chart of accounts
Balance sheet accounts include: assets, liabilities, and equity. Hence, these accounts could be numbered between 1000 and 3999. The digits usually represent the following:
- first digit: major financial statement classification (e.g., asset, liability);
- second digit: sub-classification (e.g., current asset, noncurrent asset); and
- third digit: specific account (e.g., cash, inventory, notes payable).
By using this pattern of numbering accounts a company can easily sum up balances in accounts to arrive at total assets or total current assets, for example.
Assets are the economic resources a business uses to accomplish its main goal (i.e., increase the owners' wealth). Assets can be current (e.g., cash, accounts receivable) and non-current (e.g., fixed assets, long-term investments). Asset accounts normally have debit balances. In the chart of accounts and on the balance sheet, current assets are listed first. Examples of current assets include: cash (cash in checking accounts, cash in savings accounts, cash on hand), accounts receivable, and inventory. Next on the chart of accounts are noncurrent assets, which include tangible and intangible assets such as land, buildings, vehicles, furniture and fixtures, equipment, deposits, and patents.
Liabilities are debts and obligations of a company. Liabilities can be short-term (current) or long-term (non-current). Examples of liabilities include accounts payable, salaries payable, loans payable, warranties payable, and accrued expenses. Liability accounts usually have credit balances.
Equity is what an entity "owes" to owners. Equity can be called shareholders' equity in a corporation or owner's equity in a sole proprietorship. Equity accounts may include common stock, contributed capital (paid-in capital), retained earnings, and drawings. Equity accounts normally have credit balances.
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