Discretionary expenses are nonessential costs that can be reduced or eliminated without affecting business operations. A COA only includes the expenses required to keep your business running. Most group accounts into broad categories and then use a numbering system to organize subaccounts within each category so teams can sort and report on transactions efficiently. While the system needs to be comprehensive, it should also be straightforward to prevent errors and confusion.

• With a robust numbering system in place, organizations are better positioned to achieve their financial objectives and sustain long-term growth.
• If you ever need to reorganize account numbers, do it carefully, and make sure you update every connected report, workflow, or software integration.
• This setup helps companies track their spending and earnings, making it easier to see where they stand financially.
• The chart of accounts (COA) is a list of accounts a company uses to record its financial transactions.
• It provides a structured way to categorize financial information, making it easier for businesses to track and manage their finances effectively.
• This structured categorization simplifies the process of preparing financial statements, making it easier for stakeholders to quickly access and comprehend the financial information they need.

What are the best practices for integrating a chart of accounts with accounting software or ERP systems?

• Try a demo to see how Ramp automates chart of accounts management from day one.
• This account balance or this calculated amount will be matched with the sales amount on the income statement.
• The expense accounts category captures all of the money you spend generating revenues for your company – advertising expenses, employee benefits, office supplies expenses, rent, utilities, and endless more.
• You can have multiple liability accounts in the COA, representing different types of your obligations.
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• Non-operating expenses are not that directly tied to running the business.

The following is an example of some of the accounts that might be included in a chart of accounts. The COA has been a fundamental component of accounting https://btch.bg/holmes-energy-group-updated-january-2026-request/ systems for centuries, evolving with accounting practices. While we can’t name the exact date when it became a standard accounting practice, we can trace its evolution through history – from tally sticks to accounting software. Let’s look back in history to see how people came to the idea of having the chart of accounts as an accounting necessity.

How to set up a chart of accounts

A well-structured numbering system helps streamline the categorization of transactions, ensuring consistency and clarity across financial statements. This structure not only aids in compliance with accounting standards but also enhances decision-making processes. Five major account types in a chart of accounts are divided into balance sheet accounts and income statement accounts. While CoA can vary depending on the business, it will include assets, liabilities, equity, income/revenue, and expenses.

Example: Standard Chart of Accounts List

Empowering businesses with expert leadership, real-time intelligence, and technology-driven efficiency. If left unchecked, the COA can become cluttered with old, unused accounts that no longer serve a purpose. This makes the chart harder to navigate and increases the risk of errors. Many firms neglect to review the COA regularly, allowing unnecessary accounts to pile up over time. Once the COA is drafted, review it carefully to ensure everything is properly categorized, there are no duplicate accounts, and the numbering sequence makes sense. For example, under “Marketing Expenses,” you might add sub-accounts for digital advertising, events & sponsorships, and promotional materials.

The revenue accounts appear based on the source of unearned revenue where the income comes from. You can have multiple liability accounts in the COA, representing different types of your obligations. Liabilities are the amounts of money a company owes to others or the obligations it needs to fulfill in the future. Think of debts to suppliers, loans from banks, or unpaid expenses – they are your liabilities. The total assets amount represents the value of all the company’s resources.

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Suppose the business has two departments, a production department and a marketing department, and wants to be able to identify its expenses between the two. All other account types (assets, liabilities, equity, and revenue) are not separated and are to be recorded in a default code referred to as the General department. The two digit department codes allocated are the Production Department 01, and the Marketing Department 02 with the default department being the General Department 00.

• You should consider our materials to be an introduction to selected accounting and bookkeeping topics (with complexities likely omitted).
• Most accounting software tools, including QuickBooks, Xero, and NetSuite, come with default COAs you can automate and customize.
• Current liabilities are classified as any outstanding payments that are due within the year, while non-current or long-term liabilities are payments due more than a year from the date of the report.
• But if you are starting from scratch, then the following is great place to start.
• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

The Income Statement Accounts

Each account in a general ledger chart of accounts is allocated a code depending on the chart of accounts numbering system used by a business. The purpose of the chart of accounts numbering system is simply to group similar accounts together and to provide an easy method of remembering and referring to an account when preparing journal entries. Accounts are classified into assets, liabilities, capital, income, and expenses; and each is given a unique account number. Each category will include specific accounts for your business, like a business vehicle that you own would be recorded as an asset account. Every time you add or remove an account from your business, it’s important to record it in your books and your chart of accounts (COA) helps you do that.

Can the chart of accounts influence the audit process, and if so, how can it be designed to facilitate audits?

Expenses appear on the income statement directly chart of accounts numbering below revenue, or COGS if used. Accurate expense tracking in the COA is important for reporting,  budgeting, cash flow management, and tax preparation. Organizing revenue accounts clearly in the COA is essential for monitoring business performance.