Chart of Account (COA): Benefits, Elements, Classification, Examples
The accounting account code or chart of accounts is a list of all accounts to make it easier to record company finances. Come on, learn more about the benefits, types, how it works, and examples of COA in this discussion!
What is a Chart of Accounts (COA)?
A chart of accounts is a list or index of all financial accounts recorded in the general ledger of a company’s financial statements. Contains details of both expenses and income from the company’s financial transactions in a specified period.
The goal is to categorize all financial transactions and make it easier to prepare data and information to evaluate the company’s financial performance at a certain time.
Each company can create a COA according to its needs. In short, the function of COA is to present financial statements, such as balance sheets, assets, liabilities, equity, profit and loss, and reports from other accounts in a systematic and orderly manner.
How the Chart of Accounts (COA) Works
Companies use COA to present financial statements in accordance with reporting standards. This will make it easier to create categories of expenses, income, assets, and liabilities–as well as to facilitate the analysis of financial statements.
Reports are organized in order of accounts. The balance sheet accounts, assets, liabilities, and shareholder equity are listed first. Then, the accounts in the income statement, as well as the income and expense accounts.
The COA consists of the account name, a brief description, and a specific identification code for each element of the account. Each chart in the list is assigned a multi-digit number; All asset accounts generally start with the number 1.
Shareholders, potential investors, or related parties who will read the financial statements will find it easier to understand these accounts.
Benefits of Chart of Accounts (COA)
COA is designed as a business map of various financial accounts. Where you can’t memorize all the accounts in the financial statement book, so they must be arranged neatly.
So, what are the functions of the chart of accounts?
1. Facilitate the Preparation of Financial Statements
Makes it easy to know which transactions should be recorded in which accounts. A well-designed COA should separate all of the company’s most important accounts with specific codes for all types of transactions.
2. Facilitate Data Processing
If you want to calculate or process data for certain expenses, it’s easier to get that data.
3. Facilitate Financial Analysis
You can research a company’s financial health and make it easier to follow financial reporting standards. Of course, it will give you an idea to make better decisions regarding financial conditions.
4. Controlling the Recording of Financial Statements
Without a COA, there could be errors in recording transactions. It would be confusing if there were no systematic categories of transactions and arrangements.
5. Facilitate Revision of Financial Records
If there is a recording error, you can easily identify and correct it. Because each account has been grouped according to category.
6. Make it easier to read financial statements
If the income, expenses, profit and loss, and so on are not arranged neatly, it will be dizzy to see it. Moreover, if you have a need to show financial statements to other parties such as potential investors or shareholders.
Elements of Chart of Accounts (COA)
Here are two mandatory COA elements that must be defined at the outset:
1. Account Code (Account Code)
Yes, there is a special account code at COA in the form of letters (alphabet), numbers (numeric), and a combination of numbers and letters.
The numeric code starts with the smallest number for general accounts. While a larger number or a larger number means loading a more specific account.
- Big Cash account code: 0001
- Petty Cash account code: 0002
- Accounts Receivable code: 0003
Other examples: 100-000 (assets or assets), 200-000 (debt), 300-000 (capital), 500-000 (cost of goods sold), and so on.
Alphabet account codes are arranged based on the abbreviation of the account name to make it easier to remember.
- KSB: Big Cash
- KKC: Petty Cash
- PD: Accounts Receivable
However, many accountants rarely use alphabetic codes because they lack flexibility for account names.
Alphabet codes are more often used for company names, vendors, regions, and more. Example: PMJ (code name for the company PT Maju Jaya).
Letter and Number Combination Code
A combination of letter and number codes to distinguish between accounts with the same name, but different subcategories.
Can also be used for the name of the vendor, bank, region, customer, or company whose letter code has been used.
2. Account Name
Classification by account name for easy identification of different types of transactions for which account. The goal is to clarify the previous code.
There are no specific rules for creating account names, but the following must be observed:
- Must be unique and different. The number and letter codes are for one account only.
- Each account is entered according to its category.
- Account names should be short and clear.
- Account numbering is given a range limit. For example, the stock account code is 100, the daily stock code is 105, and the weekly stock code is 110. So, there is still a place to name new stocks with codes between 100-110.
Classification Chart of Accounts (COA)
Each COA account corresponds to two main financial statements: a balance sheet and an income statement.
Used to create a business balance sheet, generally consisting of:
1. Asset Account
Consists of the following sub -categories:
- Saving account
- Petty cash balance
- Funds that have not been deposited
- Inventory assets
- Prepaid insurance
Each asset account can be numbered sequentially, for example, 1000, 1020, 1040, 1060, etc.
2. Liability Accounts
A liability account may have sub-accounts, such as:
- Company credit card
- Accrued liabilities
- Accounts payable
- Payroll obligations
- Debit notes
The number system for each liability account can start from 2000, and use an easy-to-follow sequence.
3. Owner’s Equity Account
Equity represents the value remaining in the business after deducting all liabilities from assets. Shareholders’ equity can be broken down into the following accounts:
- Ordinary stock
- Preferred stock
- Saved income
The owner’s equity account numbering system for large corporations can continue from liability accounts, or go from 3000 to 3999 for example.
Income Statement Account
The main components of an income statement account are income accounts and expense accounts.
1. Revenue Accounts ( Revenue Accounts )
Revenue accounts to track every revenue ( revenue ) of the business derived from the sale of products, services, rentals, etc.
2. Expense Accounts ( Expense Accounts )
Consists of all expense records, including utilities, wages, rent, production costs, etc.