Charts of account assignment help

A chart of accounts (COA) is a listing of each account a company owns, along with the account type and account balance, shown in the order the accounts appear in the company’s financial statements. It is used in the general ledger is a listing of all accounts of an organization, which includes both balance-sheet accounts and income-statement accounts. Accounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement.

The chart is used by the accounting software to aggregate information into an entity's financial statements. The chart is usually sorted in order by account number, to ease the task of locating specific accounts. The accounts are usually numeric, but can also be alphabetic or alphanumeric. 

This method uses nominal codes for accounts which are normally divided into five groups: assets, liabilities, owners/shareholders equity, revenue and expenses. They’re divided in this way so that they can be grouped together for reporting purposes and are easily identifiable.

For example: all asset nominal codes have the prefix of 1, all liabilities have the prefix of 2, capital accounts with 3, revenue accounts with 4, and expense accounts with 5.

Appropriate gaps are provided between numbers so that if some accounts are left unassigned or new accounts need to be added in future, then that makes it easy to add more accounts in future without disturbing other accounts.

E.g. Assets: 

1010 - Cash

1020 - Accounts receivable

1030 - Interest received

Further, there can be sub-code like 1010C for cash in hand and 1010B for cash at bank.

Liabilities:

2010 - Accounts payable

2020 - Interest payable

2030 - Utilities payable

Further, there can be sub-code like 2020A for interest payable to Mr.A and 2020B for interest payable to bank.

Capital:

3010       Partners’ Capital

3020       Partners’ Drawings

Further, there can be sub-code like 3010A for Partner A and 3010B for partner B.

Revenues

4010       Revenue from sale of goods

4020       Interest Income

Further, there can be sub-code like 4010B for interest income from bank and 4010D for interest income from debtors.

Expenses

5010       Salary Expense

5020       Rent Expense

5030       Bad debt expenses

Further, there can be sub-code like 5010S for salary expenses incurred by the selling department, and 5010A for salary expenses of the administrative office.

The chart of accounts may be changed over time to suit the needs of the business. New accounts may be added as the need arises and old accounts may be updated. However, it should not mess up the previous books and records, especially when the chart of accounts is used in computerized accounting.

The account numbers of a company with different departments and operations might have digits to reflect the department or operation to which the accounts relate. Similarly, a company operating in different territories or regions might include a digit in its account numbers to identify the territory or region to which a particular account relates. For example, the account numbers of Procter and Gamble (a multinational consumer goods company) consist of more than 30 digits to reflect different departments, operations and territories or regions

Importance

1) Helps in grouping: This is the most important function and the most important reason why a business follows Chart of accounts is because it helps in grouping the accounts into various categories. This further helps to calculate various sub-totals and grand totals. It may also provide guidance on correct classification of transactions.

2) Helps in preparing the trial balance: This is the next most important function. COA helps in grouping which acts as a basis to prepare and balance the trial balance. The trial balance is prepared by using the list of accounts from the chart of accounts and extracting balances for each account from the general ledger. 

3) Traceability: Each transaction entered into an accounting system must have a nominal code attached to it in order for that transaction to be traceable.

4) Consistency: It is important to create a chart of accounts that is unlikely to change for several years, so that you can compare the results in the same account over a multi-year period. If you start with a small number of accounts and then gradually expand the number of accounts over time, it becomes increasingly difficult to obtain comparable financial information for more than the past year. 

5) Help balance the account: For every transaction which is debited to a nominal code, a corresponding credit will be posted to another nominal code. When you enter a debit, you can match it with a corresponding credit as soon as payment is received.

6) Eases the task of the accountant: Because of the charts of accounts, it is very easy to find out any transaction ever recorded in the books of accounts whenever required using the code assigned to it.

7) It can be customized as per the needs of the organization: COA can be tailored to fit the particular needs and financial interests of a company. The COA can grow with a company to include new categories by leaving gaps in the coding system. Codes can be removed if a product line of function is removed.

8) It can provide both the overall view and specific view to understand the working of the business overall or one of its functions: Not only if shows the overall financial performance of the business but it also provides a customized view of the accounts and information relevant to a business.

9) Works as a starting point: It acts the starting point of an accounting system because it tells which accounts to include in a general ledger and what mechanism to use in making and posting journal entries.

10) Size reduction. Periodically the account list is reviewed to see if any accounts are immaterial amounts or have been inactive over the periods. If so, these accounts are shut down and the related figures might get rolled into a larger account. Doing this periodically keeps the number of accounts down to a manageable level.

Template / Format 

There is no single chart of accounts template that fits all businesses. The size and the nature of accounts included depend on the complexity of the business and its legal structure. 

E.g. a company will have debentures account and interest payable account, etc. in the capital section of its chart of accounts, while a partnership and a sole proprietorship will have partners’ accounts, owner’s equity account, withdrawals account, etc.

Below is a sample chart of accounts appropriate for a small business

Asset accounts

Account Type : Assets

Account Code : 1100

Liability accounts 

Account Type: Liabilities

Account Code: 2100

Equity accounts 

Account Type: Equity

Account Code: 2100

Revenue accounts 

Account Type: Revenue

Account Code: 4000

Expense accounts

Account Type: Expenses

Account Code: 5000-6000

[5000 - Cost of Goods Sold , 6000 – Expenses]

Chart of Accounts in Computerized accounting 

Nowadays all the large scale businesses and even smaller businesses prefer to operate through computerized accounting rather than the manual one. Chart of Accounts plays a very vital role in preparation of trial balance and the financial statements of the firm.

Trail balance is prepared to check the mathematical accuracy of the books of accounts and grouping is very important part of that. Chart of Accounts is very important for grouping. As we know that we assign a unique account code to each individual account (e.g. 1100 to cash) on the basis of its account type (e.g. cash is an asset so the code assigned to it can be anything between 1000-2000 as the account prefix for assets is 1). Hence, the computer application is able to automatically all the accounts with prefix 1 and group them together under assets to find out the total balance for assets.

Same process is followed for liabilities and equity accounts. 

Further, the liabilities and equities are clubbed on one side and the assets on another to check if the total is equal or the difference between them is zero (as done under the trial balance).

Similarly, the revenue and expenses accounts grouping is done and by deducting the total expenses from total revenues, the net profit or loss is obtained which goes ahead to become a part of the capital in the Balance Sheet.

Hence the balance sheet and the statement f operations can be prepared very easily and accurately with the help of Charts of Accounts.