What is a chart of accounts?

‍

A chart of accounts (COA) is the structured list of every financial account used in a company's general ledger. It is the framework that determines how every financial transaction is categorised, and therefore how financial statements are structured and what they can report.

‍

Every journal entry posted to the GL references one or more accounts from the chart of accounts. The COA determines whether a transaction is classified as revenue, cost of sales, operating expense, asset, liability, or equity.

‍

How a chart of accounts is structured

‍

Charts of accounts are typically organised into five top-level categories:

‍

Assets — what the business owns: cash, receivables, inventory, fixed assets, prepayments.

‍

Liabilities — what the business owes: payables, accruals, loans, deferred revenue.

‍

Equity — the residual interest of owners: share capital, retained earnings, reserves.

‍

Revenue — income from operations: sales by product line, service revenue, other income.

‍

Expenses — costs of running the business: cost of goods sold, staff costs, overheads, depreciation.

‍

Within each category, accounts are numbered and named at whatever level of detail the business needs for reporting.

‍

Why the chart of accounts matters

‍

A well-designed chart of accounts makes financial reporting straightforward. A poorly designed one creates reporting problems: accounts that are too broad to provide useful analysis, accounts that are inconsistently used across entities, and a structure that does not support the business's actual reporting needs.

‍

For multi-entity businesses, maintaining a consistent chart of accounts across all entities is a prerequisite for financial consolidation.

‍

Related: General ledger (GL) · Financial consolidation · Journal entry · Financial close