Chart of accounts meaning and examples

The chart of accounts of any business entity is the list of all the accounts in the ledger book. One importance of it is that accountants and bookkeepers used it to post transactions to their correct account head as well as prepare management and annual reports . This article explains in detail how an organization’s chart of accounts can be structured. 

1. What's chart of accounts

A chart of accounts is a list of all ledger accounts of an entity and their classification in relation to assets, liabilities and equity. The chart serves as a guide to posting transactions in the books of accounts of a business. It applies a coding system to ensure that each account is classified under a particular head. Therefore making it easy for bookkeepers and accountants to source out from the list. 

2. Importance of chart of accounts

The following five points explain the significance of a chart of accounts.

2.1 Assists in preparing financial statement

Financial statement must contain several accounts in the list. Either independently, offsetting or aggregation. Therefore, the chart must show the accounts and where it is classified in the financial statements. In doing so, they are categorized into assets, liabilities, equity, income and expenses. For example, utility bill a/c will be classified into expenses and so on.

2.2 Aids Posting transactions to ledger

The chart of accounts aid the posting of transactions to their respective ledger. When a business event occurs, they must be posted to there ledger accounts. With the aid of the list this can be done with ease.

2.3 Easy location of accounts

Accountants and bookkeepers can easily locate several accounts type they need to post a transaction, locate errors and corrwct them. Journal entries can easily be passed if the lost of the accounts are readily available.

2.4 Ensure organization of business ledger

Organizing is an important aspect of every business. And all aspect of a business must be organized. This includes the chart of accounts. This is usually organized into income, expenses, assets, equity and liabilities.

2.5 Allow additions of accounts to the list

Allows the accountant to add more accounts type to the list. If for example, a business bought a new equipment which is not in the chart of account, the accoint can be created and added to the list.

3. How to code a chart of account

Coding is done using either numerals or a combination of numbers and letters, referred to as alphanumerals. The main category is givin a code while each head in the category has a sub code follow by the code in the individual accounts. An example is shown below:

3.1 List of accounts in a chart

The list below is merely an example. Some organizations may have more complex charts compared to others. 

4. Conclusion 

In final words, charts of accounts contain the list of all accounts in the financial statements. Whether the account is shown separately on those statements or they are aggregated or offset. We list out an example of them to guide you in its understanding.