Chart of Accounts
In any organization that maintains a formal accounting system, the chart of accounts (COA) is a document that itemizes the accounts used for recording financial transactions in the organization’s general ledger. Before computerized accounting systems became commonplace, many organizations utilized manual accounting systems with the related general and subsidiary ledgers. The evolution of the COA has paralleled the progress of accounting from manual to mechanical and computerized accounting systems.
The evolution of the COA has been marked by several developments influenced, inter alia, by time and geography. Internationally, there is no standard COA. However, legislation guides the preparation of the COA in some countries. France’s laws include guidelines for creating the COA. Sweden has a sophisticated standard COA. Norway also has its peculiar COA. Although the United States of America has no standard COA, tax reporting requirements oblige organizations to maintain particular accounts for advertising, entertainment, travel and additional expenses. With the limited state influence on the COA universally, accounting personnel generally customize the COA for their respective organizations.
Newly created accounts become part of the COA after authorized personnel create and enter them into the accounting system. When necessary, accounts may be amended or deleted. Intervals between account numbers facilitate continued addition of accounts.
The length and complexity of the COA usually vary directly with the scale of the organization’s operations. Thousands of accounts may suffice for a large organization, whereas fewer accounts may suit a small enterprise. In accounting systems with numerous accounts or advanced automation, accounts usually are coded. Numerical codes predominate but alphabetical and alpha-numeric codes have been used. All codes are often termed account numbers whether they are numerical, alphabetical or alpha-numeric. For some small businesses, accounting software packages use account names only; they do not utilize account numbers.
In the COA, accounts usually have
unique codes that facilitate identification of each account,
appropriately descriptive names,
subsidiary classifications and
other attributes that facilitate the accounting classification of transactions.
The sequence of the COA is usually according to the account numbers and the order in which the accounts appear in the respective financial statements: balance sheet accounts precede income statement accounts. An example of this sequence is below, in Exhibit 1.
Account numbers have ranged from three to five or more characters in length. Each digit or other character of an account number tends to represent an accounting fact. A digit may represent the financial statement associated with an account. It may also indicate the account classification. Additional digits may indicate the organizational unit for which the account is maintained. In the example represented by Exhibit 1, account numbers begin with “1” for assets, “2” for liabilities, “3” for owner equity, “4” for revenue, and “5” for expenses. Exhibit 2 shows some of these hypothetical account numbers. In some organizations, “6” and “7” start account numbers for some expenses.
Different accounting packages have their customizable proprietary COA for each type of organization. Printed or electronic copies of the COA facilitate the coding of accounting transactions.