Think of a chart of accounts (COA) as a filing cabinet where all a company’s financial transactions are stored and a complete listing of all the accounts that are currently in use are kept. It is divided between accounts reflected in the balance sheet and income statement and helps keep general ledger data organized in a way to make financial reports meaningful to analysts and investors.
Every business, no matter what industry, needs a chart of accounts. It is the foundation of a good accounting system and essentially functions as the roadmap to a company’s finances. It typically contains the name of the account, the account type, account balance, and a brief description. As opposed to the general ledger, which shows all accounts across a company’s history, a chart of account only shows the currently open accounts.
A chart of accounts indicates all accounts a business owns in the order they appear on the financial statements:
- Balance sheet accounts
- Asset accounts
- Liability accounts
- Equity accounts
- Revenue accounts
- Expense accounts
Why is a Chart of Accounts Important?
When it comes time to make important business decisions, a current chart of accounts keeps revenue, expenses, and other data neatly organized and gives an accurate perspective on a business’s financial outlook.