Account management is the backbone behind every organization's workflow. Ask any expert CPA, and they'll tell you the importance of keeping a clear record of all the organization's transactions.
As someone responsible for an organization's accounting records, you can be asked for any financial detail at any point in time. It wouldn't be wrong to expect your bosses to demand an old invoice or a long-forgotten event's expenditure details from you. Going through old records means a lot of hassle and paperwork that can be frustrating and time-consuming.
Luckily, you can save yourself from this annoyance by organizing all financial details in an easily accessible way. Keeping a chart of accounts is probably the only way to keep your organization's money-related information safe and easy to access. The chart of accounts is a great tool that small businesses can use for sound financial bookkeeping.
Given below is an idea of what a chart of accounts is and why it’s important.
What is Chart of Accounts?
A chart of accounts is sometimes also referred to as COA. Simply defined, a chart of accounts is a full-fledged list of an organization's financial details. These financial details include earnings, expenditures, profit, equities, assets, and all other such money-related information about the organization.
All this information is sorted and well organized in a defined order in a COA. This sorting makes it easier to track the business’s transactions you need quickly and without any hassle. For a business with more than one working account, the chart of accounts would include details from all the accounts separately.
The Chart of Accounts allows anyone to quickly glance at an organization's financial status and lets them track down the information they need easily. Since everything is sorted in different (yet related) sets, there're lesser chances of losing any financial detail once you have entered it in the COA.
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Who needs to use Chart of Accounts?
A Chart of Accounts is especially useful for a small business that doesn't have enough of a budget to seek out well-known online accounting system. If you are using accounting software, your organization's chart of accounts should automatically be generated by the application. You can make desired changes to the categories in your automated COA if you want to make it more refined and easier to read.
The kind of organization a chart of accounts is used for determines how it can be made. Your chart of accounts may or may not have categories present in other charts depending on your business's nature. Usually, an accountant with considerable knowledge of practical bookkeeping can design a COA for your business so you can easily keep track of the company’s financial health.
How does Chart of Accounts work?
For all the financial accounts to be organized, the company’s General Ledger (GL) systematically keeps everything in place. The GL is made up of financial transactions, account balances, accounting periods and the chart of accounts.
The COA is divided into different accounts categories:
Asset accounts
Asset accounts record everything the company owns including current assets (cash, inventory, accounts receivable), fixed assets (real estate, equipment), and non-current assets (investments).
Liability accounts
This refers to everything the company owes including leases, loans, overdrafts, and accounts payable.
Equity accounts
This accounts for the company’s net income like retained earnings and owner’s equity.
Revenue accounts
This covers all the company’s income such as sales revenue, rental and interest income, asset sales, and investment gains.
Expense accounts
Expense accounts typically include all the company’s expenditures and operating expenses like direct costs (wages), cost of goods sold (COGS), indirect costs (rent, utility bills), taxes, and non-cash expenses like depreciation and amortization.
Income Statement and Balance Sheet Accounts
The company’s assets, liabilities, and equities fall under the company’s balance sheet accounts, while the revenues and expenses are sub-accounts under the income statement accounts.
Both the balance sheets and income statements’ account detail are arranged in columns. The account names appear in lines with its corresponding account numbers or account codes for those with letter combinations. Along with the account number is the account type, and the account description or a brief detail specific to the account line.
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Why is Chart of Accounts so important?
Other than just allowing you easy access to your specific financial details, a COA has other significant benefits for an organization. All these benefits make it extremely important for your business to have an updated chart of accounts, no matter how small it is.
Although a COA sometimes helps different organizations differently, here are some of its common uses for all businesses. We're sure that these points will urge you to start recording transactions in a COA if you don't have one yet.
1. Accessibility
A COA is probably the easiest way of recording your business's finances. It keeps separate account details about your oldest to your newest transactions and lets you quickly access or discard an account when needed. Old accounts can even be used for historical comparison of the company’s finances.
2. Paperless accounting
A COA frees you from a lot of paperwork and the need to remember the exact revenue coming in and expenses-related outflow from different streams. It acts like a self-explanatory map of your business's finances that guides you to exactly where you want to be.
3. Improve business processes
By providing a financial statement to investors, business managers, and other key stakeholders, the management can make well-informed business strategies. It is also easier for them to observe and comply with financial reporting standards.
4. Tax and legal compliance
Having an error-free and updated chart of accounts supports your company in abiding legal requirements, act in accordance with local and federal regulations, and fulfilling tax obligations.
5. Classification and categorization
A well-designed COA enables accurate and meaningful financial reporting. It allows businesses to generate financial statements, such as balance sheets, income statements, and cash flow statements, that provide an overview of their financial performance. Because a COA has expenditures, profits, losses, and all other monetary elements sorted separately, it helps you get an idea of how your business is doing financially.
6. Lead business direction
Just by looking at your COA and the financial reports you obtain from it, you can make better decisions about what you need to do in order to generate more income and accept more losses.
7. Identify best time for growth and expansion
If you are planning to expand or hand over your business, it is important to know how much the company is really worth. With your chart of accounts organized and the cash flow statement laid out, you are more likely to get an accurate valuation for your company.
Conclusion
Having an organized Chart of Accounts is a vital component of financial management for all types of businesses. Let’s recap the key reasons why a COA is important:
Organized financial structure
Accurate financial reporting
Decision-making and analysis
Scalability and growth
Budgeting and business planning
Enhanced financial control
Overall, you can look at COA as a replacement tool for all your boxes of receipts and bulky finance-related files. It organizes years’ worth of financial details on one sheet. It also sorts them into different accounts or compartments, so that you can quickly access whatever information you need.
If you need help setting up or re-doing your chart of accounts, please reach out to Josh Hall at Josh.Hall@HallAcctCo.com or Jeremy Hall at Jeremy.Hall@HallAcctCo.Com for more information. From tax filing strategies to tips on bookkeeping and accounting, we’ve got you covered.