Chart Of Accounts - Create The Perfect Chart Of Accounts In Four Steps

What is a chart of accounts and why do you need one? A chart of accounts (COA) records all of a company’s transactions using a unique set of codes that keeps files consistent and easy to recognize. A COA is essential to organize financial information in a way that is relevant and comparative for both internal and external parties. As your business grows, you can create new accounts that best suit your accounting needs.

Whether you’re setting up a chart of accounts for the first time, or you’ve already got one and want to improve it, here I will teach you step-by-step how to have the perfect chart of accounts for your company!

1. Add Account Numbers

The first thing you need to know is that COA records are classified like this:

Account Number        Account Name (Description)

10000 to 29999 ……. Asset and valuation accounts

30000 to 39999 ……. Liability accounts

40000 to 49999 ……. Capital accounts

50000 to 59999 ……. Income/Gain accounts

60000 to 99999 ……. Expense/Loss accounts

Account numbers are divided into balance sheet (10000 – 49999) and income statement (50000 – 99999).

Oftentimes business owners forget to add account numbers to their COA. This is a big mistake! Account numbers let you reorganize your COA easily and more accurately record your company’s financial data.  If you haven’t added account numbers in front of your accounts, I highly recommend you do it now!

You can also add location, division or product information into your COA. For example, if you have two warehouses in California, you can title the first location “Inventory 20001” and the second location “Inventory 20002.” Same theory applies to divisions and products.

2. Set Up Subaccounts

For each account, you can set up subaccounts, which have several benefits. Subaccounts allow you the flexibility to outline the details of smaller accounts and collapse them into one big account so you can see the overall financial information.

3. Update The Structure

It is common to periodically update the structure of the chart of accounts in order to more accurately reflect changes in your business. For example, if you start selling products on a new sales platform, you’ll want to record all the sales in a new COA so you can examine the success of your new strategy. Also, some accounts may contain such small transactions that it no longer makes sense to record information in them. Consequently, incremental changes to the chart of accounts are to be expected.

4. Communicate Your Changes

When the new COA is added, be sure to communicate the changes to your team so that they will record financial information in the same way going forward. If you do alter the structure of your COA, be aware that this makes it more difficult to compare the company’s current financial results to those of prior periods, since the information may now be stored and presented differently. Remember, any changes to your COA will impact your financial reporting.

Now you’re ready to set up your chart of accounts like a pro! What are you waiting for?