Five Things to Know About A Chart of Accounts

Five Things to Know About A Chart of Accounts

In a recent webinar with Early Growth Financial Services’ VP of Operations, Ryan Johnson, we reviewed the importance of building a Charts of Accounts (COA) as an essential part of building up your startup accounting function. You can access the deck here, click below to view the recording or read on for a summary.

1. What is a Chart of Accounts (COA)?

In simple terms, a chart of accounts is an indexed list of all the different account classifications for your organization’s expenses. A COA is targeted to your company’s specific revenue streams and forms the core of your accounts chart system.

2. Why do you need a Chart of Accounts?

Your COA helps you track and report each class of data for which you spend or receive funds. It should align with your business’ financial structure and provide the level of detail you need in your financial statements.

3. What is included in a COA?

COAs have 6 essential categories of funds to track.

For more details on what is included in each category, take a look at our previous post: Creating Your Chart of Accounts.

4. What’s the deal with all the numbers?

Once you are comfortable with your main categories, you need to create a numbering system for your COA. These are usually 4 digits long. The convention is that each category of accounts shares its first two digits, while the following digits denote subcategories. For example, you might use a series of numbers beginning with 1,000 for assets (with 1,001 for the cash subcategory), while starting with 2,000 for your liabilities (and using 2,001 for your accounts payable subcategory).

Flesh out your COA as fully as you can, leaving room for future account categories. One key thing to remember is that it is not static. It can and should change based on if you develop new revenue streams as well as the types of expense you have change.

5. How can a COA help drive my business decisions?

While they might seem like some arcane accounting convention, the structure embedded in a COA helps you interpret your financial statements. Making it intuitive helps you glean the maximum amount of financial information from your statements in the most efficient way possible.

The way a COA is organized makes it easier for you to isolate and analyze discrete business functions. It helps you to disaggregate and understand the composition of your revenue as well as the balance between revenue and specific categories of expenses. In other words, it’s a tool that allows you to measure the value-added you are gaining from your business activities.

You don’t need to reinvent the wheel; there are COA templates available. But use them only as starting points to help you tailor yours. The purpose of a COA is the customized picture and deep insight it gives you on your business. Make sure when you set yours up that you choose accounts that are relevant to your business.

Do you need support and resources to set up your charts of accounts, or other help getting your (financial) ducks in a row? Contact Early Growth for a free 30-minute financial consultation.

 

Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.

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