Chart of Accounts Example: A Look at the Concept, Sample Chart of Accounts (and More Examples)

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The chart of accounts is essential for businesses, offering a standardized framework for consistent financial recording and reporting. It enhances financial control, aids in budgeting and compliance, and facilitates effective communication and strategic decision-making.

Today, we’re looking at the concept of a chart of accounts in more detail.

The evolution of accounting practices: how chart of accounts came to the scene

The chart of accounts has been a fundamental component of accounting systems for centuries, evolving as accounting practices have developed. While it’s challenging to pinpoint an exact date when the chart of accounts became a common accounting practice, we can trace its evolution through history. This evolution mirrors the complexities of restaurant bookkeeping, where every transaction plays a crucial role in financial management.

Early accounting systems (pre-industrial revolution)

In the early days of accounting, during the medieval period, simple record-keeping systems were employed. However, there wasn’t a standardized chart of accounts as we know it today.

Double-entry bookkeeping (15th century)

The advent of double-entry bookkeeping in the 15th century, attributed to Luca Pacioli, marked a significant milestone. Double-entry bookkeeping introduced the concept of recording transactions with corresponding debits and credits, enhancing the accuracy of financial records. While Pacioli’s work laid the foundation for modern accounting, a standardized chart of accounts had yet to emerge.

Industrial revolution (18th and 19th centuries)

The Industrial Revolution brought about significant changes in business structures and increased the complexity of transactions. During this period, businesses recognized the need for more structured and standardized accounting systems.

20th century

With the growth of business and increased regulatory requirements in the 20th century, the need for standardized accounting practices became even more apparent. Organizations started to develop their charts of accounts to categorize and organize financial transactions systematically.

Computerization (late 20th century)

The advent of computers in the latter half of the 20th century changed accounting practices. Computerized accounting systems facilitated the creation and management of extensive charts of accounts. Accounting software allowed for greater flexibility, customization, and efficiency in managing financial data.

International standardization (late 20th century to present)

International accounting bodies, such as the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) in the United States, have played a role in standardizing accounting practices globally. These standards provide guidelines for financial reporting, including the structure of the chart of accounts.

Today, the chart of accounts is an integral part of accounting software, and its use is widespread across various industries and organizations.

But let’s break it down.

The chart of accounts anatomy: what are accounts, and why there’s a chart of them in your accounting?

To understand the chart of accounts, you might want tot figure out what are accounts in your books. While it’s clear for accountants, non-financial folks might not get the concept of accounts in accounting, confusing it with the everyday notion of bank accounts. Modern account reconciliation software often utilizes this structure to automate and streamline financial processes.

In accounting, the term accounts doesn’t solely refer to bank accounts where individuals store money. Instead, it encompasses a broader and more abstract meaning.

What’s an account in a general ledger

In a nutshell, accounts in accounting are systematic records that capture and categorize a business’s financial transactions.

You might want to think of these accounts as detailed financial folders, with each folder dedicated to a particular aspect of a business’s economic life. For instance, there are accounts for assets like cash, accounts receivable, and inventory, as well as accounts for liabilities such as loans payable. Additionally, there are accounts for revenues generated and expenses incurred during the normal course of business operations.

These accounts are maintained in the general ledger, a comprehensive accounting record that summarizes all financial transactions. The general ledger is like the central hub where all the individual accounts come together, providing a comprehensive view of a company’s financial position and performance.

As you can get it, the purpose of using accounts in accounting is to facilitate accurate record-keeping, financial analysis, and the preparation of financial statements. Categorizing transactions into specific accounts helps businesses track and evaluate their financial activities, enabling better decision-making, compliance with reporting standards, and communication of financial information to relevant stakeholders.

So, if we say the chart, we mean…

When we speak of a chart in the accounting context, we usually mean the arrangement or layout of different accounts within a general ledger.

Each account in the chart represents a specific type of financial activity, providing a logical and standardized way to categorize and record transactions.

At this point, the chart of accounts is like a backbone of the overall accounting system, helping organize and classify financial information and providing a better, more digestible overview of a company’s financial position.

What’s a standard chart of accounts: a look at a sample chart of accounts

In the United States, there is a standardized chart of accounts that is widely used by businesses and organizations. This standardization is particularly relevant when dealing with transactions such as the IRS Treas 310 Tax Ref, as it ensures that all financial activities are categorized correctly for tax purposes and compliance.

The chart of accounts typically includes categories such as assets, liabilities, equity, revenue, and expenses. Within each category, there are specific accounts that represent different types of transactions, so there’re always a number of subaccountis within each account. Her’re how a standard chart of accounts may look like:

Chart of accounts example

Assets

In financial accounting, a company’s assets account includes two main categories: current assets and non-current assets. Each provides valuable insights into the business’s financial health and operational capabilities. 

Current assets

Current assets are resources a company expects to convert into cash or use up within one year or the operating cycle, whichever is longer. These assets help assess a company’s short-term liquidity and ability to cover its immediate obligations. Here are some common types of current assets:

  • Cash and cash equivalents
    Cash and cash equivalents are the most liquid assets a company holds. This category includes physical currency, bank balances, and short-term investments a company can quickly convert into cash.
  • Accounts receivable
    Accounts receivable represent amounts owed to a company by customers for goods or services provided on credit. These are short-term assets reflecting the company’s expectation of receiving cash shortly.
  • Inventory
    Inventory consists of goods held for sale or raw materials used in production. Effectively managing inventory is crucial for maintaining a balance between supply and demand.
  • Prepaid expenses
    Prepaid expenses represent payments made in advance for goods or services a company will consume in the future. These are considered assets until the benefit is received.

Non-current assets

Non-current assets, also known as long-term assets, have a useful life extending beyond one year. These assets contribute to a company’s long-term success and understanding of its overall financial stability. Here are the main categories of non-current assets:

  • Property, plant, and equipment (PP&E)
    PP&E includes tangible assets such as land, buildings, machinery, and vehicles. These assets are used in the production or service delivery and are not intended for resale.
  • Intangible assets
    Intangible assets lack physical substance but have significant value to a company. Examples include patents, trademarks, copyrights, and goodwill. These assets contribute to a company’s competitive advantage and market position.
  • Investments
    Investments encompass long-term holdings in other companies, bonds, or other financial instruments. They represent a company’s strategic financial decisions to generate returns over an extended period.
  • Other non-current assets
    This category may include a variety of long-term assets not covered by the categories above. It’s a catch-all for long-term prepaid expenses, deferred tax assets, and more.

Liabilities

Understanding a company’s financial health goes beyond just analyzing its assets. Liabilities, the financial obligations a company owes to external parties, provide a comprehensive view of its financial standing. In financial statements, liabilities are broadly categorized into current and non-current, each displaying various aspects of the company’s financial commitments.

Current liabilities

Current liabilities represent obligations a company expects to settle within one year or within its operating cycle. These liabilities play a pivotal role in assessing a company’s short-term financial obligations and ability to meet immediate demands. Let’s explore some common types of current liabilities:

  • Accounts payable
    Accounts payable are amounts a company owes suppliers for goods or services received on credit. Managing accounts payable is crucial for maintaining good supplier relationships while ensuring timely payments.
  • Short-term debt
    Short-term debt comprises borrowings that are due within a year. It often includes obligations such as short-term loans and lines of credit. Companies use short-term debt to address immediate financing needs.
  • Accrued liabilities
    Accrued liabilities represent expenses that a company has incurred but not yet paid. These may include accrued wages, taxes, and other obligations accumulated over time.
  • Unearned revenue
    Unearned revenue arises when a company receives payment for goods or services it has not yet delivered. It represents an obligation to fulfill the promised goods or services.

Non-current liabilities

Non-current liabilities, or long-term liabilities, are obligations that extend beyond one year. Analyzing non-current liabilities is crucial for understanding a company’s long-term financial commitments and its ability to manage sustained operations. Here are some common types of non-current liabilities:

  • Long-term debt
    Long-term debt includes obligations that mature beyond the following year. It often involves loans with extended repayment periods, such as bonds and mortgages. Managing long-term debt is essential for maintaining a healthy debt structure.
  • Deferred tax liabilities
    Deferred tax liabilities arise when a company’s taxable income is lower than its accounting income. These liabilities represent taxes that will be payable in the future when the temporary differences reverse.
  • Other non-current liabilities
    This category encompasses a variety of long-term obligations not covered by the previous classifications. It may include long-term provisions, pension obligations, and other deferred liabilities.

A look at a company’s liabilities gives investors, creditors, and analysts valuable insights into its financial stability, risk management practices, and capacity to meet short-term and long-term obligations.

Equity

Equity, a fundamental part of a company’s financial structure, represents the ownership interest of its shareholders. Let’s look at the components that constitute equity.

  • Common stock
    Common stock, often known as ordinary shares, represents the basic ownership interest in a company. When investors purchase common stock, they acquire a stake in the company and gain certain rights, such as voting at shareholder meetings. The value of common stock can fluctuate based on market dynamics and the company’s performance.
  • Retained earnings
    Retained earnings are a crucial element of equity, representing the cumulative profits a company has retained after distributing dividends to shareholders. These earnings are typically reinvested in the business to fuel growth, repay debt, or build reserves. Retained earnings reflect the historical financial performance of a company and contribute to its overall net worth.
  • Additional paid-in capital
    Additional paid-in capital reflects the amount investors pay for shares above their nominal (par) value. When a company issues shares at a premium, it records the excess amount over the par value as additional paid-in capital. This capital provides a financial cushion and supports the company’s expansion and development initiatives.
  • Treasury stock (if applicable)
    Treasury stock refers to shares that a company buys back from its shareholders. This stock is considered a contra-equity account, and you deduct it from the total equity. Companies may repurchase their shares to signal confidence in their prospects, support stock prices, or use them for employee stock option programs.

Equity, as a whole, serves as a measure of a company’s net worth, indicating the residual interest of shareholders in its assets after deducting liabilities. It also helps evaluate a company’s financial leverage and ability to weather economic downturns.

Revenue

Revenue, the lifeblood of any business, is a general metric for evaluating its financial performance. It encompasses various sources of income that contribute to the overall growth and sustainability of the organization.

  • Sales revenue
    Sales revenue, often considered the cornerstone of a company’s income, is generated through selling goods or services to customers. This primary revenue stream reflects the core business activities and indicates market demand, product popularity, and overall sales effectiveness.
  • Service revenue
    In addition to sales revenue, service revenue represents the income one gets as a service provider. This category includes fees for consulting, professional advice, or other service-oriented offerings. Service revenue provides insights into how a company diversifies its income streams and its ability to leverage expertise for financial gain.
  • Interest revenue
    nterest revenue is your revenue from offering financial instruments such as loans, bonds, or other interest-bearing assets. For financial institutions and companies with substantial investments, interest revenue significantly contributes to overall income. Monitoring interest revenue is crucial for assessing a company’s financial health and the returns generated from its investment activities.
  • Other revenue
    The other revenue category is a catch-all for income that doesn’t fall directly into the sales, service, or interest categories. It can include sources such as licensing fees, royalties, or gains from the sale of assets. Examining other revenue provides a holistic view of a company’s diverse income streams and ability to capitalize on unique opportunities.

Diligent analysis of these distinct revenue components helps investors gain insights into the diversification of income sources, identify potential growth areas, and assess the overall resilience of the business model.

Expenses

The Expenses account contains the data on the costs incurred to generate revenue and sustain operations. Expenses are categorized into various components that offer insights into a company’s financial health and operational efficiency.

Operating expenses

Operating expenses are the daily costs of running a business, which are associated with its core operational activities and occur in the usual course of business.

  • Selling expenses
    Selling expenses encompass costs related to promoting and selling products or services. They include expenditures on advertising, marketing, sales commissions, and other activities aimed at driving sales.
  • General and administrative expenses
    General and administrative expenses cover the broader overhead costs necessary for the daily functioning of a business. This category includes expenses related to office rent, utilities, salaries of non-production staff, and other administrative functions.
  • Depreciation and amortization
    Depreciation and amortization are non-cash expenses that allocate the cost of tangible and intangible assets over their useful lives. These accounting practices recognize the gradual reduction in the value of assets over time.
  • Research and development
    Research and development expenses represent investments in innovation and new products or services. These costs are essential for companies aiming to stay competitive in dynamic markets.

Non-operating expenses

Non-operating expenses are costs not directly tied to a company’s core business activities. Understanding these expenses is crucial for assessing the broader financial impact on the organization.

  • Interest expense
    Interest expense is the cost of borrowing money a company faces when it has an outstanding debt. Monitoring interest expense is vital for evaluating a company’s debt management practices and overall financial leverage.
  • Income tax expense
    Income tax expense represents the taxes a company owes to governmental authorities, including current and deferred taxes, reflecting the company’s contribution to public finances.
  • Other non-operating expenses
    This category encompasses miscellaneous non-operating expenses that don’t fit into the previous classifications. It may include one-time charges, legal settlements, or other extraordinary costs that impact the company’s bottom line.

Cost of Goods Sold (COGS)

  • The Cost of Goods Sold (COGS) account in the chart of accounts is where a company records the direct expenses linked to producing the goods or services it sells. These expenses cover things like raw materials, labor, and manufacturing costs. Calculating COGS helps understand the actual cost of making products. By subtracting COGS from total revenue, a company can find its gross profit, which indicates profitability and operational efficiency.

Other comprehensive income

It’s the account where a company records certain gains and losses not included in the net income. It’s a way to capture changes in the company’s financial position that might not immediately affect profits.

OCI might include various sub-accounts, but common ones are:

  • Foreign currency translation adjustment
    It shows the changes in the value of assets and liabilities due to fluctuations in exchange rates.
  • Unrealized gains/losses on investments
    This sub-account reflects the changes in the value of investments that haven’t been sold.
  • Pension plan adjustments
    Here, a company records gains or losses in its pension plan assets.
  • Cash flow hedges
    This account documents gains or losses from financial instruments used to manage cash flow risks.

The purpose of OCI is to provide a more comprehensive view of a company’s financial health, considering factors beyond immediate profits. It offers a broader perspective on how various elements impact the overall financial picture over time.

Gains and losses

The Gains and losses account in the chart of accounts is where a company records any profits (gains) or losses it experiences. This account is like a financial record of the good and not-so-good financial events. Gains are positive changes that bring in more money, while losses are negative changes that mean the company has lost money. By tracking gains and losses, a company can understand how well it’s doing financially and make informed decisions about its business.

  • Gain or Loss on Sale of Assets
    Gain or loss on sale of assets is a specific sub-account under the Gains and losses category in the chart of accounts. This sub-account is used to record the financial impact of selling assets. If the asset’s selling price is higher than its book value (the value at which it is carried on the company’s books), a gain is recorded, reflecting a positive financial outcome from the sale. Conversely, if the selling price is lower than the book value, a loss is recorded, indicating a negative impact resulting from the sale.

Tracking gains or losses on the sale of assets provides insights into how well the company is managing its assets and making strategic decisions regarding their disposal.

Accounts numbering in the chart of accounts

The accounts are typically arranged in a hierarchical order for easy navigation and reporting. The numbering convention often follows a pattern where the first digit represents the major account category, and subsequent digits provide more detail. For example:

  • 1000-1999 usually go to the Assets category;
  • 2000-2999 go to Liabilities;
  • 3000-3999 are the numbers for Equity;
  • 4000-4999 are the numbers for the Revenue category;
  • 5000-5999 is the numeration for the Cost of Goods Sold accounts;
  • 6000-6999 are the numbers assigned to Operating expenses;
  • 7000-7999 are the numbers for Non-Operating expenses
  • 8000-8999 are the numbers the Other comprehensive income category possesses;
  • 9000-9999 go to Gains and losses.

The specific accounts and their numbering may vary by company, industry, or specific accounting standards adopted. It’s also common to have sub-accounts for more detailed tracking. Regular updates to the COA may be necessary to reflect changes in the business structure or accounting requirements.

The standardization of the chart of accounts is often facilitated by accounting software, which provides pre-defined templates that align with generally accepted accounting principles (GAAP). This helps ensure consistency and comparability in financial reporting.

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Let’s look at some chart of accounts examples

Now, let’s explore a couple of examples of the chart of accounts for businesses in various industries – online retail, manufacturing, and service businesses. We presume they accept online payments via payment platforms (for example, Stripe, Paypal, or Square). You might also notice that there are specificities of the business that might affect the structure of the chart of accounts. But let’s proceed and look at the examples.

Example #1 – Online retail business

In an online retail business, tracking inventory is essential for effective management. The chart of accounts, at this point, includes categories like Inventory and COGS to monitor the value of goods in stock and the expenses associated with their sale. As shipping is usually an integral part of businesses of this type, the chart of accounts might also include specific accounts like Shipping revenue and Shipping costs. This way, a company can monitor the financial aspects of shipping. Additionally, the COA accommodates various online payment methods, using corresponding accounts to record received funds more accurately.

Now, let’s look at the possible online retail sample chart of accounts.

Account CodeAccount NameDescriptionTo increase
Assets
1010Cash on handsPhysical cash available.Debit
1020Cash in bankCash held in the business’s bank accounts.Debit
1030Accounts receivableAmounts owed to the business by customers.Debit
1040InventoryValue of goods available for sale.Debit
Liabilities
2010Accounts payableAmounts owed by the business to suppliers.Credit
2020Short-term loans payableAny short-term loans the business has taken.Credit
2030Credit card payableOutstanding credit card balances.Credit
Equity
3010Owner’s equityOwner’s investment in the business.Credit
Revenue
4010Product salesIncome from selling products.Credit
4020Shipping revenueIncome from shipping services.Credit
Expenses
5010Cost of goodc soldCost directly associated with producing goods.Debit
5020Shipping costsCosts associated with shipping.Debit
5030Website maintenance expensesExpenses related to maintaining the online retail platform.Debit
Online payments
6010PayPal accountFunds held in the business’s PayPal account.Credit
6020Stripe accountFunds held in the business’s Stripe account.Credit
6030Square accountFunds held in the business’s Square account.Credit

Example #2 – Production (manufacturing) business

In manufacturing, the production process involves different stages, such as raw materials, work in progress, and finished goods. The chart of accounts helps keep track of these stages with the Raw materials inventoryWork-in-progress inventory, and Finished goods inventory accounts, monitoring the value at each production step.

If the business offers manufacturing services to others, a separate revenue account, Manufacturing services, is included to track income from these services. Just like in online retail, the COA for manufacturing businesses might also include accounts for various online payment systems such as PayPal, Stripe, and Square, ensuring efficient tracking of digital transactions.

Account CodeAccount NameDescriptionTo increase
Assets
1010Cash on handsPhysical cash available.Debit
1020Cash in bankCash held in the business’s bank accounts.Debit
1030Accounts receivableAmounts owed to the business by customers.Debit
1040Raw materials inventoryValue of materials for production.Debit
1050Work-in-progress inventoryValue of partially completed products.Debit
1060Finished products inventoryValue of completed products ready for sale.Debit
Liabilities
2010Accounts payableAmounts owed by the business to suppliers.Credit
2020Short-term loans payableAny short-term loans the business has taken.Credit
2030Credit card payableOutstanding credit card balances.Credit
Equity
3010Owner’s equityOwner’s investment in the business.Credit
Revenue
4010Product salesIncome from selling products.Credit
4020Manufacturing servicesIncome from providing manufacturing services.Credit
Expenses
5010Cost of raw materialsCost of materials used in production.Debit
5020Labor costsCosts associated with the workforce.Debit
5030Manufacturing overheadIndirect production costs.Debit
Online payments
6010PayPal accountFunds held in the business’s PayPal account.Credit
6020Stripe accountFunds held in the business’s Stripe account.Credit
6030Square accountFunds held in the business’s Square account.Credit

Example #3 – Service business

Service businesses earn income by providing services. The chart of accounts, in this case, might include revenue accounts like Service fees and Consulting revenue to track earnings. An expense account named Professional fees can be added to monitor costs for hiring professionals. Marketing expenses is another expense account to track promotional costs. The COA also includes accounts for online payment systems to monitor digital transactions.

Account CodeAccount NameDescriptionTo increase
Assets
1010Cash on handsPhysical cash available.Debit
1020Cash in bankCash held in the business’s bank accounts.Debit
1030Accounts receivableAmounts owed to the business by customers.Debit
Liabilities
2010Accounts payableAmounts owed by the business to suppliers.Credit
2020Short-term loans payableAny short-term loans the business has taken.Credit
2030Credit card payableOutstanding credit card balances.Credit
Equity
3010Owner’s equityOwner’s investment in the business.Credit
Revenue
4010Service feesIncome from providing services.Credit
4020Consulting revenueIncome from consulting services.Credit
Expenses
5010Marketing expensesCosts associated with marketing efforts.Debit
5020Professional feesCosts related to hiring external professionals.Debit
5030Office expensesGeneral office-related costs.Debit
Online payments
6010PayPal accountFunds held in the business’s PayPal account.Credit
6020Stripe accountFunds held in the business’s Stripe account.Credit
6030Square accountFunds held in the business’s Square account.Credit

Beyond income and expense tracking: why is COA important for efficient nusiness finance management?

We previously described a chart of accounts as a detailed map for a company’s finances. It’s not just about keeping track of money coming in and going out, but it helps a business manage its money smartly in many ways:

  • Organizing finances
    The COA organizes financial information in a neat and orderly way. This makes it easier for everyone in the company to understand where the money is coming from and where it’s going.
  • Making accurate reports
    By putting transactions into specific categories, the COA helps create accurate financial reports. This is important for making decisions within the company and for showing outsiders, like investors or regulators, exactly how well the business is doing.
  • Planning the budget
    With a good COA, a company can plan its budget more effectively. It helps set realistic financial goals and decide how to use money wisely.
  • Checking performance
    The COA lets managers look closely at how well different parts of the business are doing. They can see which areas are making money and which ones might need some attention.
  • Controlling costs
    By using the COA to keep an eye on different types of expenses, a company can control its costs better. This means making sure money is spent in the right places.
  • Following rules
    Having a clear COA makes audits (thorough checks of financial records) easier. This is important for following the rules and keeping everyone who relies on the company’s financial information happy.
  • Helping big decisions
    Business leaders use the COA to make important decisions about the future. Whether it’s growing the business, entering new markets, or investing in new technology, the COA gives a clear picture of what’s financially possible.
  • Working with financial systems
    Many high-tech financial systems use the COA as a kind of language. This helps different parts of a business talk to each other smoothly, reducing mistakes and making things run more efficiently.
  • Planning for taxes
    The COA is handy for planning how to handle taxes. It helps a business find ways to save on taxes and makes sure everything is done according to tax rules.

Bottom line

Wrapping it up, the chart of accounts has evolved alongside accounting practices, shaping a standard framework for organizing finances. From medieval record-keeping to today’s digital era, it’s become a business’s backbone, aiding in accurate record-keeping, financial analysis, and regulatory compliance. As a fundamental guide, the chart of accounts continues to play a vital role in modern finance management worldwide.

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