When managing a business, in order to understand whether you’re profitable or which areas of your business may need reevaluating, you’ll need a system that tracks and organizes your company’s cash flow. This is where a chart of accounts (COA) comes in. A chart of accounts can help provide you with a financial overview of your business, assisting you in documenting everything from overdue invoices to office supplies you purchased. It can be a useful tool that not only gives you a bird’s eye view of your business’s financial health, but also demonstrates what areas of your company may need more work in order to become more efficient and profitable.
A chart of accounts, or COA, is a centralized index of all of your business’s financial activities that are typically broken down into these main types of accounts: assets, liabilities, equity, expenditures, and revenue. Each of these sections gives the reader insight into the day-to-day operations of your business — where funds are coming from and how they are being spent. Each category also typically includes information such as the account name and description of the item, as well as a reference number that can be used as an identifier. The COA will look different for a small business as it will for a large enterprise, and some companies might also get granular with sub-categories and sub-accounts. However, in general, this expanded perspective into a company's financial accounts can help you, as well as others invested in your company, to identify which parts of your company are profitable as well as inefficiencies you may need to address. For example, if you find that your accounting employees are spending a lot of time addressing customers’ overdue invoices, you may need to invest in an improved accounts receivable process. By using a chart of accounts, you can identify issues like that, gain perspective of the bigger picture, and make informed business decisions.
As previously stated, a chart of accounts is divided into categories such as assets, equity, expenditures, liabilities, and revenue. These sections are typically listed in order of how the accounts are shown on the company's financial statements. For instance, asset, liability, and equity — which are considered part of the balance sheet on a financial statement — are listed before items that are considered to be part of the income statement, such as revenue and expenses. A chart of accounts is usually created to sum up an accounting period, a certain length of time such as a fiscal year or quarter.
An example chart of accounts can include the following specific accounts-
Company credit card
Cost of goods sold
Some companies, especially larger businesses, may require that each department put together its own chart of accounts, using the same types of sections. This can make it easier for an organization to gain a clearer image of how various departments like sales, operations, and marketing are operating individually if they have their own departmental budgets.
When putting together a chart of accounts, it’s important to make sure your data can be easily read and interpreted. Using strategies such as outsourcing accounting can help streamline the process and free up your time so you can focus on gleaning and acting on insights from your chart of accounts.
A chart of accounts is a tool that gives you a clearer picture of where your business is financially, even on a department-by-department basis. These types of insights can help guide you where you may need to invest more time and resources into improving a department’s efficiencies or supporting an already successful area of your company. This may be especially helpful for stakeholders, investors, and business owners, giving them an idea of your company’s daily functions and may even inspire more confidence in your business’s long-term success. Chart of accounts can also help to ensure that your financial statements are compliant with legal standards.
COA helps to structure the general ledger and is foundational for financial statements. It's important to have an organized chart that has a logical structure reflective of the real organization structure of the business. Here are some best practices-
Create a hierarchical structure by using accounts and sub-accounts, or parent-child accounts, and group them in a way that makes logical sense. The parent accounts will remain fixed, and the sub-level accounts will be added accordingly. Make sure to limit the numbers of levels to a maximum of four, because it will do more harm than good if the hierarchy gets out of control. Also makes sure to consolidate accounts that can be grouped together rather than creating a separate account for every item on your ledger.
Employ four-digit account numbers to keep your COA organized. Assign the first digit to the parent-level accounts and work your way down from there. Example:
1000 - Assets
1100 - Fixed Assets
1110 - Real Estate
1112 - Vehicles
1200 - Accounts Receivable
Different bookkeeping platforms have different ways of approaching the same functionality, and it's important to organize your COA structure to align with your accounting software's capabilities. It's cheaper and more efficient to organic your COA than switching to a new accounting system.
Since a chart of accounts (as well as all the accounting work that goes into it) can be such an important tool to recognizing where your organization sits financially, you’ll want accounting software that’s accurate and simplifies the process. This can help to not only free up more of your time to pursue other important aspects of your business, but also give you peace of mind that at the end of the fiscal year, you won’t have to worry about inaccuracies fudging your numbers. As a Bill.com customer, you can access accounting tools that can help you easily track your cash flow, set up automated systems that can help you manage invoices and paying your business expenses, and gain a better view of what financial direction your company is headed.