GL - Understanding Chart of Accounts

GL - Understanding Chart of Accounts

A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA has transitioned from the legacy accounts, capturing just the natural account, to modern-day multidimensional COA structures capturing all accounting dimensions pertaining to underlying data enabling a granular level of reporting. Learn more about the role of COA in modern accounting systems.

What is a Chart of Accounts?

A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA is used to organize the finances of the entity and to segregate expenditures, revenue, assets, and liabilities in order to give interested parties a better understanding of the financial health of the entity.

The chart of accounts is a list of all the accounts and their numbers contained in the general ledger. The accounts are listed in the order of assets, liabilities, owner's equity, revenue, and expenses. Transactions can be posted to each defined account in COA and it can capture balances in the general ledger chart of accounts is a way to outline the accounting system of a business, the chart of accounts establishes how the business will operate, what information will be captured, and what information will subsequently be readily retrievable by the system for reporting and other needs.

Is Chart of Accounts worth discussing? Does it really matter?

Have you ever wondered after hearing such phrases from accountants like "It's not in the chart of accounts. We don't know how to enter your transaction" or "We can't process your invoice without an account number."  In the case of new general ledger implementations, nothing moves forward unless the chart of account has been finalized.

While to many non-financial managers and also to new IT implementers increased focus on the chart of accounts seems unwarranted and it appears that the client is unnecessarily slowing down the project by discussing chart of accounts too much. That's not really their purpose—and everyone who has worked in an IT project involving general ledger knows that this structure needs to be finalized first before other discussions can start and that too because it has a serious impact on the entire general ledger design.

GL - Understanding Chart of Accounts

Why we need a Chart of Accounts?

The entire recording process of any accounting system requires a basic organization of data so that the accounting data can be clubbed into meaningful accounts and represented in a way useful for the users and stakeholders. For example – purchases on credit from vendors through invoices can be later summarized and reported with some clarity as to what was purchased, why it was purchased, what organization(s) benefited from those expenditures, and what is the unpaid liability on account of all those purchases. That basic organization is called a chart of accounts.

You might think of the organizing system for your company's accounting data as a collection of buckets, or accounts, each with a particular kind of data inside. There might be a bucket for each ledger account names and associated numbers used by a company, arranged in the order in which they normally appear in financial statements—Assets, Liabilities, Owners' Equity or Stockholders' Equity, Revenue, and Expenses.

For management analysis, there will also be a bucket for each product or service the company sells and one for each type of department or cost center where those expenses might incur as it sells its products or services. The chart of accounts is an organized, comprehensive list of all those buckets. The buckets, in turn, are labeled with their appropriate account number and arranged by the kind of data they hold, so that accountants can quickly find the right bucket in which to store the latest piece of data about a particular accounting transaction. These buckets are then arranged and rearranged during the accounting process and their contents are counted and checked to produce reports that summarize the data they contain.

Purpose of Chart of Accounts:

General Ledger is used to recording and store each individual account and their transactions. The Chart of Accounts is the basis of any accounting system. The purpose of the Chart of Accounts is to classify each financial transaction and record it with reference to appropriate business dimensions enabling the users to select or extract the financial data through account inquiry screens or reports. Finally enabling reporting on (or enquire about) the sum total of financial transactions at various levels on the chart.  

Adding more dimensions to the Chart of Accounts:

In ERP’s COA’s are captured using a defined segmented structure. Segmented COA Structure enables a business entity to record other accounting dimensions pertaining to financial transactions.

Modern organizations are complex generally consisting of many different lines of business; operating in different geographies, dealing in multiple products and services, running different projects, and moving resources and employees across these functions. The "chart of accounts” must reflect these complexities to enable effective management and external reporting. An effective chart of accounts structure can track revenue and expenses appropriately for different business dimensions like departments, geographies, product lines, etc. and can provide accurate analysis for decision making, and for reporting to government agencies, sponsors, and stakeholders.

What is Chart of Accounts Segment?

In automated accounting systems and ERPs, the chart of accounts is made up of and represented as a string of numeric and alphanumeric fields that act as identifiers. The companies define different segments to capture relevant business dimensions along with the natural account associated with the transaction. Companies may define anywhere from one to dozen segments to make up their Chart of Accounts and capture granular level business information associated with the transaction.

Examples of accounting dimensions are Company, Cost Center, Department, Product, etc. The figure below shows an example of the Segmented Chart of Accounts Structure using some of the commonly used business dimensions.

Thorough planning and evaluation of financial needs is a prerequisite to designing a good COA Structure. We have created a separate tutorial on GL Accounts that helps you understand the concept of Natural Accounts and some key GL Accounts. There is a full tutorial on the understanding of COA in detail and best practices to define an effective COA Structure.

Related Links

Creation Date Tuesday, 30 November -0001 Hits 24200

You May Also Like

  • GL - Review & Approve Journals

    GL - Review & Approve Journals

    Review and Approval mechanisms ensure that the accounting transaction is reasonable, necessary, and comply with applicable policies. Understand why we need review and approval processes, what are they, and how they are performed in automated general ledger systems. Learn the benefits of having journal approval mechanisms in place.

  • Legal Structures in Businesses

    Legal Structures in Businesses

    Businesses not only vary in size and industry but also in their ownership. Most businesses evolve from being owned by just one person to a small group of people and eventually being managed by a large numbers of shareholders. Different ownership structures overlap with different legal forms that a business can take. A business’s legal and ownership structure determines many of its legal responsibilities.

  • Concept of Subsidiaries

    Concept of Subsidiaries

    A subsidiary is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or wholly controls the activities and policies of the daughter corporation.

  • Global Business Services (GBS) Model

    Global Business Services (GBS) Model

    Global business services (GBS) is an integrated, scalable, and mature version of the shared services model. Global Business Services Model is a result of shared services maturing and evolving on a global scale. It is represented by the growth and maturity of the Shared services to better service the global corporations they support.

  • Legal Structures for Multinational Companies

    Legal Structures for Multinational Companies

    A multinational company generally has offices and/or factories in different countries and a centralized head office where they coordinate global management. A multinational company (MNC)is a corporate organization that owns or controls the production of goods or services in at least one country other than its home country.

  • Team-Based Organizational Structure

    Team-Based Organizational Structure

    Team-based structure is a relatively new structure that opposes the traditional hierarchical structure and it slowly gaining acceptance in the corporate world. In such a structure, employees come together as team in order to fulfill their tasks that serve a common goal.

  • Horizontal or Flat Organizational Structures

    Horizontal or Flat Organizational Structures

    Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees.  Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.

  • GL - Recurring Journal Entries

    GL - Recurring Journal Entries

    A “Recurring Journal” is a journal that needs to be repeated and processed periodically.  Recurring Entries are business transactions that are repeated regularly, such as fixed rent or insurance to be paid every month. Learn the various methods that can be used to generate recurring journals. See some examples and explore the generic process to create recurring journals in any automated system.

  • Organizational Design

    Organizational Design

    An organizational design is the process by which a company defines and manages elements of structure so that an organization can control the activities necessary to achieve its goals. Good organizational structure and design helps improve communication, increase productivity, and inspire innovation. Organizational structure is the formal system of task and activity relationships to clearly define how people coordinate their actions and use resources to achieve organizational goals.

  • GL - Adjustment Entries

    GL - Adjustment Entries

    In this article, we will describe how to determine if an account needs adjustment entries due to the application of the matching concept. Learners will get a thorough understanding of the adjustment process and the nature of the adjustment entries. We will discuss the four types of adjustments resulting from unearned revenue, prepaid expenses, accrued expenses, and accrued revenue.

Explore Our Free Training Articles or
Sign Up to Start With Our eLearning Courses

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved