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What is a Chart of Accounts

       Accounts and Bookkeeping


Date Published: August 2008

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A Chart of Accounts (COA) is a way of showing a business´s financial information in such a way that it is possible to make good financial decisions based on the information that it shows.

The COA will be made up of all the individual accounts that make up the overall accounts of a business. These individual accounts (or "pots") are the Nominal Codes. (See our article What is a Nominal Ledger for details on what a Nominal Codes and Accounts are, and their purpose). The Nominal Accounts make up the entire Nominal Ledger, but the Nominal Ledger just provides a list of these accounts, together with each account´s current balance. This provides useful information, but it is not structured.

Structure

The COA provides the necessary structure to the Nominal Accounts to allow the overall picture of a company´s financial health to be easily seen. The actual structure that the COA provides will vary. It will depend on the type of business that a company is involved with, and the type of information that is useful to the business owner or accountant.

However, there are usually common elements to a COA; a Chart Of Accounts will normally always include the following sections:

  • Assets
  • Liabilities
  • Income
  • Expenses

Assets and Liabilities are generally included under a section called "Balance Sheet Items", and Income and Expenses are in another section called "Profit and Loss". Therefore, the ´top level´ of the Chart of Accounts is just two sections of:

  1. Balance Sheet Items
  2. Profit and Loss Items

The assets and liabilities etc. are ´children´ of these sections:

  • Balance Sheet Items
    • Assets
    • Liabilities
  • Profit and Loss Items
    • Income
    • Expenses

The totals of the assets and liabilities make up an overall total for the Balance Sheet Items.

Similarly, the totals for the Income and Expenses make up an overall total for the Profit and Loss Items. This makes sense in our basic understanding of accounts. Our profit is calculated as whatever income we have received, minus any expenses incurred, and will give us an overall Profit or Loss.

So here is a very simple Chart Of Accounts to start with:

Chart Of Accounts Debit
Credit
£2,500.00
£2,500.00
Balance Sheet Items  
£1,000
  Assets  
£2,000.00
  Liabilities £1,000.00
Profit and Loss Items  
£1,500.00
  Income  
£3,000.00
  Expenses £1,500.00

We can´t see the Nominal Accounts that make up the figures, but this does demonstrate what the Chart Of Accounts is doing and can be used for; and if we
understand that, then we are well on our way to understanding how a Chart Of Accounts can be used to help our own business and the business decisions that
we need to make.

If we take each line at a time:

  1. The top line is just a title line, showing that it is a Chart Of Accounts (!) and that the left column is the debit side and the right column is the Credit side.
  2. The second line shows the total Debit and Credit amounts for the figures that are showing in the COA. These should always be the same and is why the COA is the basis for the Balance Sheet (see What is a Balance Sheet for further details on Balance Sheets).
  3. The next line shows the total figure for the Balance Sheet Items, and this shows a Credit amount of £1,000.
  4. The next two lines show the figures for the Assets and the Liabilities, which make up the £1,000 Balance Sheet Items total, i.e.£2,000 assets, minus £1,000 liabilities equals the total credit amount of £1,000.
  5. The next line show the total figure for the Profit and Loss Items. This is again a Credit amount, this time of £1,500.
  6. Again, the next two lines show the two figures that make up this total Profit and Loss figure, i.e. £3000 of income minus £1,500 of expenses equals the total credit figure of £1,500.

You are probably familiar with income and expenses, since these are the basis of very rudimentary accounts; as children if we are given pocket money, this is our income, and when we go and spend it on sweets or toys this makes up our expenses. Of course, as children we won´t have access to a bank account to go overdrawn, but if we borrow money from our parents we have to pay it back, so even then we are in familiar territory with overdrafts! And if we were to have bought toys wisely and looked after them, they could well now be assets! In terms of accounting for business purposes, we deal with assets and liabilities, but what are these?

Assets

An asset is "...a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.". A simple example of an asset to the business is a bank account that has money in it. It has money as a result of past events (i.e. the business has sold more products or services than expenses have been incurred), and this money can be used for the future benefit of the business, e.g. purchase more stock to sell.

The Asset section of the Chart Of Accounts will include all elements of your accounts that are deemed to be assets of the business, and may include thigns such as furniture and fittings, equipment, goodwill etc. These are generally elements that your accountant will deal with.

Liabilities

On the other side, a liability is "...a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits". A simple example of a liability is a bank account that is overdrawn. It is overdrawn as a result of past events, for example stock has been purchased that has not yet been sold. When the stock is sold, the money will need to be paid into the bank account to settle the liability.

Note that in the above example of a liability, although the bank account is a liability because it is overdrawn, the stock that has been purchased is an asset to the business. If we look again at the definition of an asset ("a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise") we can see that the stock is a resource that the company controls as a result of having purchased it, and the future economic benefits that are expected to flow to the business are from selling the stock at a profit. This demonstrates why it is important to be able to view all the accounts of a business in a structured way to get an overall picture of a business´s financial health. If you were only given the bank account to look at you may think that the business was not healthly, because it is £10,000 overdrawn. However, if you then see that there is an asset of stock totalling £100,000 then you are likely to draw a very different conclusion.

The Liabilities section of the Chart Of Accounts will include all elements of your accounts that are deemed to be liabilities to the business, and may include things such as creditors etc. As with your assets, these are generally elements that your accountant will deal with.

Income

The income section of the COA will include all the nominal accounts that relate to sales that your business makes, and therefore this section may vary greatly from business to business depending on how much detail you want to track. For example, you may sell products and also provide services, and you may just want to know how much income the sale of products makes, and how much income the sale of your services makes. You may, however, sell four different products, and want to know in your Chart of Accounts, how much income is generated by each individual product. This will require a separate Nominal Account to be set up for each product, and each sale will then be allocated against the relevant Nominal Accounts, or pot. (Again see our What is a Nominal Ledger article for details on Nominal Accounts).

Expenses

The expenses section of your Chart Of Accounts will, as the name suggests, show all the costs that are incurred as a result of running your business. In general these will be split into two main areas:

  • Overheads
  • Direct Expenses

Overheads are defined as expenses that are incurred whether you sell nothing, or whether you sell 1000 ´things´. For example, if you have an office then all the expenses incurred as a result of having the office will be an overhead, since you will still have to pay these costs even if you make no sales. This will include the office rent, electricity etc.

Direct Expenses are the expenses that are incurred as a direct result of making a sale. For example, if you sell red widgets, then naturally you won´t be able to sell a red widget until you have either bought it from your supplier, or bought the necessary component parts to make the red widget. Therefore this is an expense that is incurred as a direct result of making a sale.

The expenses that are shown will, like the income, depend on the type of business that is being run, and in a similar way to Income, the amount of detail that is shown in the Chart of Accounts will depend on the Nominal Accounts that have been set up.

The Chart of Accounts combines all of the above information in a layout that then represents the business´s financial status. By including Balance Sheet Items and Profit and Loss figures, the COA can be used as the basis for producing a Balance Sheet at the end of a financial year (or a Trial Balance during the year). See our article What is a Balance Sheet for more details on this.

Using what we have discussed so far, let´s use the Chart Of Accounts to show our Income information in a clear and useful way. We will want to ensure that all Nominal Accounts that are used for income amounts are included in this section of the Chart Of Accounts. Let´s assume that we have a business that runs websites. This is the main purpose of the business, and the area that generates most of the income for the business. However, there are some other areas where revenue is generated, so we will want to show this separately in our chart of accounts. This will allow us to see if these extra revenue streams grow at a different rate to the main revenue streams from the websites.

We could show this in the COA as:

Profit and Loss Items £81,209.31
    Total Sales £187,487.54
        Websites £185,357.55
                WSI: Web Site - MyBuildingAdviser £60,420.51
                WSI2: Advert on MyLegalAdviser £240.00
                WSLA: Lead Generation £9.57
                WSA: Web Site - MyLegalAdviser £77,282.41
                WSW: Website - MyComputerAdviser £18,495.45
                WSM: Web Site - MySoftwareAdviser £18,039.75
                WSS: Web Site - MyTravelAdviser £3,764.00
                WSD: Web Site - MyHolidayAdviser £6,125.00
                WSAR: Website - MyGardenAdviser £1,000.00
        Other Sales £1,790.88
            COMM1: Commissions received £1,761.50
            M3: Miscellaneous - Sales £29.38
        Other Income £339.11
            AC5: Other Income £180.76
            B2: Bank Interest Received £158.35

This is fine, but there may be situations ahere we are generating income from one website but in more than one way. If we have separate Nominal Accounts set up to track these, then we can make the COA look cleaner, clearer and more extendible by adding further sub-sections, so that our Income section in our COA looks as below. The MyBuildingAdviser site is generating income via three separate nominal accounts (though the Lead Generation account is in debit):

Profit and Loss Items £81,209.31
    Total Sales £187,487.54
        Websites £185,357.55
            MyBuildingAdviser £60,650.94
                WSI: Web Site - MyBuildingAdviser £60,420.51
                WSI2: Advert on MyLegalAdviser £240.00
                WSLA: Lead Generation £9.57
            MyLegalAdvisers £77,282.41
                WSA: Web Site - MyLegalAdviser £77,282.41
            MyComputerAdvisers £18,495.45
                WSW: Website - MyComputerAdviser £18,495.45
            MySoftwareAdviser £18,039.75
                WSM: Web Site - MySoftwareAdviser £18,039.75
            MyTravelAdviser £3,764.00
                WSS: Web Site - MyTravelAdviser £3,764.00
            MyHolidayAdviser £6,125.00
                WSD: Web Site - MyHolidayAdviser £6,125.00
            MyGardenAdviser £1,000.00
                WSAR: Website - MyGardenAdviser £1,000.00
        Other Sales £1,790.88
            COMM1: Commissions received £1,761.50
            M3: Miscellaneous - Sales £29.38
        Other Income £339.11
            AC5: Other Income £180.76
            B2: Bank Interest Received £158.35

We can use a similar philosophy with our Direct Expenses in our Chart of Accounts. Remember that direct expenses relate to costs incurred as a direct
result of sales. In the case of our example business, most expenses will relate to the websites that it runs. Let´s assume that for a website there are, in general, three main costs:

  • Hosting
  • Advertising and Marketing
  • Pay-per-click campaigns

For the website "MyLegalAdvisers" these would be split into three diffferent Nominal Accounts:

                WSA-A: MyLegalAdvisers Advertising £2,293.60
                WSA-H: MyLegalAdvisers Hosting £3.98
                WSA-P: MyLegalAdvisers PPC £8,791.08

and they would appear in the Direct Expenses part of the Chart Of Accounts:

    Total Purchases £77,208.40
        Total Direct Expenses £25,165.22
            MyBuildingAdviser £2,520.83
                WSI-A: MyBuildingAdviser Advertising £71.53
                WSI-H: MyBuildingAdviser Hosting £155.64
                WSI-P: MyBuildingAdviser PPC £2,293.66
            MyLegalAdvisers £11,088.66
                WSA-A: MyLegalAdvisers Advertising £2,293.60
                WSA-H: MyLegalAdvisers Hosting £3.98
                WSA-P: MyLegalAdvisers PPC £8,791.08
            MyComputerAdvisers £3,708.81
                WSW-A: MyComputerAdviser Advertising £357.62
                WSW-H: MyComputerAdviser Hosting £61.90
                WSW-P: MyComputerAdviser PPC £3,289.29
            MySoftwareAdviser £138.03
                WSM-A: MySoftwareAdviser Advertng £138.03
                WSM-H: MySoftwareAdviser Hosting
                WSM-P: MySoftwareAdviser PPC
            MyTravelAdviser £1,231.39
                WSS-A: MyTravelAdviser Advertising £76.27
                WSS-H: MyTravelAdviser Hosting £53.94
                WSS-P: MyTravelAdviser PPC £1,101.18
            MyHolidayAdviser £4,992.81
                WSD-A: MyHolidayAdviser Advertising £1,055.43
                WSD-H: MyHolidayAdviser Hosting £107.88
                WSD-P: MyHolidayAdviser PPC £3,829.50
            MyGardenAdviser £107.88
                WSAR-A: MyGardenAdviser Advertising
                WSAR-H: MyGardenAdviser Hosting £107.88
                WSAR-P: MyGardenAdviser PPC
            Other sites £1,268.93
                WSMA: Web Site - MyGolfAdviser £442.22
                WSMW: Web Site - MyHobbyAdviser £718.83
                WSSC-H: MyAdviser Hosting £107.88
            MyDIYAdviser £26.97
                WSE-H: MyDIYAdviser Hosting £26.97
            MyMoneyAdviser £80.91
                WSP-A: MyMoneyAdviser - Advertising
                WSP-H: MyMoneyAdviser - Hosting £80.91
                WSP-P: MyMoneyAdviser - PPC

This allows us to see a figure for our Total Purchases, which is made up of our Direct Expenses and our Overheads (which are no shown above),
and it also enables us to see how the Direct Expenses figure is made up, not only by the expenses being incurred by each website, but also
where the money is being spent on each website.

Below is a complete Chart Of Accounts for our example company, allowing you to see how all the figures fit together, and how these figures can be used to
make relevant business decisions.

Debit Credit
Chart Of Accounts £203,980.79 £203,980.79
Balance Sheet Items £81,209.31
  Total Fixed Assets £973.39
    FA5: Equipment £973.39
    FA6: Equipment Depreciation
  Total Current Assets £942.38
    *CRED: Creditors Control Account £942.38
    *P&L: Profit and Loss
    *POA: Payments on Account
    PP1: Prepayments
    PP2: Accruals and Deferred Income
  Total Current Liabilities £79,293.54
    *DEBT: Debtors Control Account £3,216.32
    BA: Main Office Bank Account £3,793.51
    BA2: Deposit Bank Account £8,000.00
    BA3: Petty Cash
    BA4: Loan Bank Account £17,958.50
    CC1: Credit Card - Fred £404.55
    CC2: Credit Card - Alice £1,893.27
    CC4: Credit Card - Lisa £8.34
    PY1: Gross Wages £75,512.56
    VAT1: VAT Control Account £1,473.85
Profit and Loss Items £81,209.31
    Total Sales £187,487.54
        Websites £185,357.55
            MyBuildingAdviser £60,650.94
                WSI: Web Site - MyBuildingAdviser £60,420.51
                WSI2: Advert on MyLegalAdviser £240.00
                WSLA: Lead Generation £9.57
            MyLegalAdvisers £77,282.41
                WSA: Web Site - MyLegalAdviser £77,282.41
            MyComputerAdvisers £18,495.45
                WSW: Website - MyComputerAdviser £18,495.45
            MySoftwareAdviser £18,039.75
                WSM: Web Site - MySoftwareAdviser £18,039.75
            MyTravelAdviser £3,764.00
                WSS: Web Site - MyTravelAdviser £3,764.00
            MyHolidayAdviser £6,125.00
                WSD: Web Site - MyHolidayAdviser £6,125.00
            MyGardenAdviser £1,000.00
                WSAR: Website - MyGardenAdviser £1,000.00
        Other Sales £1,790.88
            COMM1: Commissions received £1,761.50
            M3: Miscellaneous - Sales £29.38
        Other Income £339.11
            AC5: Other Income £180.76
            B2: Bank Interest Received £158.35
    Total Purchases £77,208.40
        Total Direct Expenses £25,165.22
            MyBuildingAdviser £2,520.83
                WSI-A: MyBuildingAdviser Advertising £71.53
                WSI-H: MyBuildingAdviser Hosting £155.64
                WSI-P: MyBuildingAdviser PPC £2,293.66
            MyLegalAdvisers £11,088.66
                WSA-A: MyLegalAdvisers Advertising £2,293.60
                WSA-H: MyLegalAdvisers Hosting £3.98
                WSA-P: MyLegalAdvisers PPC £8,791.08
            MyComputerAdvisers £3,708.81
                WSW-A: MyComputerAdviser Advertising £357.62
                WSW-H: MyComputerAdviser Hosting £61.90
                WSW-P: MyComputerAdviser PPC £3,289.29
            MySoftwareAdviser £138.03
                WSM-A: MySoftwareAdviser Advertng £138.03
                WSM-H: MySoftwareAdviser Hosting
                WSM-P: MySoftwareAdviser PPC
            MyTravelAdviser £1,231.39
                WSS-A: MyTravelAdviser Advertising £76.27
                WSS-H: MyTravelAdviser Hosting £53.94
                WSS-P: MyTravelAdviser PPC £1,101.18
            MyHolidayAdviser £4,992.81
                WSD-A: MyHolidayAdviser Advertising £1,055.43
                WSD-H: MyHolidayAdviser Hosting £107.88
                WSD-P: MyHolidayAdviser PPC £3,829.50
            MyGardenAdviser £107.88
                WSAR-A: MyGardenAdviser Advertising
                WSAR-H: MyGardenAdviser Hosting £107.88
                WSAR-P: MyGardenAdviser PPC
            Other sites £1,268.93
                WSMA: Web Site - MyGolfAdviser £442.22
                WSMW: Web Site - MyHobbyAdviser £718.83
                WSSC-H: MyAdviser Hosting £107.88
            MyDIYAdviser £26.97
                WSE-H: MyDIYAdviser Hosting £26.97
            MyMoneyAdviser £80.91
                WSP-A: MyMoneyAdviser - Advertising
                WSP-H: MyMoneyAdviser - Hosting £80.91
                WSP-P: MyMoneyAdviser - PPC
        Total Overheads £52,043.18
            Vehicles £11,986.74
                FA3: Motor Vehicles
                FA4: Motor Vehicles Depreciation
                LA: HP Finance Leases
                V1: Fuel - Fred £1,210.36
                V2: Fuel - John
                V3: Car repayment - Fred £5,552.01
                V4: Car repayment - John £2,016.45
                V5: Car repairs/maintenance £2,339.17
                V6: Car insurance £58.72
                V7: Fuel - Alice
                V8: Fuel - Lisa £810.03
            Office £15,618.42
                A0003: Telephone - BT £1,623.92
                A1: Office Rent £8,214.15
                A2: Broadband Monthly £338.70
                A3: Mobile - Fred £492.41
                A5: Broadband (Fred) £21.27
                IT: Information Technology £3,808.63
                POST1: Postage £580.75
                S2: Post Office £85.29
                STA1: Stationery £453.30
            Accounts £7,777.18
                AC: Accounting £2,860.00
                AC2: Taxes £152.32
                AC3: Corporation Tax £2,552.50
                BK1: Bookkeeping Services £2,000.00
                FIL1: Filing Fees £60.00
                O2: Loan Interest £152.36
                Subsistence etc. £1,721.99
                M1: Office Lunch £756.03
                M2: Subsistence £965.96
            Insurances £1,338.16
                INS: Insurances £1,338.16
                INS1: Direct Line
            Travel/Accommodation £393.27
                T1: Parking £21.27
                T2: Rail Travel £225.37
                T3: Taxi Cab £146.63
            Marketing £7,492.79
                C1: Conferences £3,214.33
                CONST: Online Email Campaigning £63.17
                CREAT: Advertising Banners
                MARK1: Marketing £962.68
                MARK2: SEO
                OH1: Advertising £55.97
                OH2: PPC Management £1,125.00
                PR1: Promotions
                WEBCON: Web Consultancy £2,000.00
                WSG-H: Website ( General) - Hosting £71.64
            Miscellaneous £2,435.67
                AGEN1: Agency Fees
                COMM2: Commissions Paid £574.00
                G: Gifts £421.45
                LEGAL: Legal Expenses £110.00
                M: Miscellaneous - Purchases £385.09
                OS1: Offshore £5.98
                ST1: Training £600.00
                SUB1: Subscriptions £339.15
            Bank Charges etc £3,278.96
                B1: Bank Charges (General) £3,278.96
            Salaries £29,069.83
                D1: Drawings - John
                D2: Drawings - Fred £8,000.00
                PY2: NIers (BS) £6,105.50
                PY3: Nett Wages £11,911.55
                PY4: NI ees £711.87
                PY5: NI Ers (PL) £828.35
                PY6: PAYE £1,512.56
Unassigned Nominals
    A0007: Maintenance
    X: Unposted

The key to a useful Chart Of Accounts is ensuring your Nominal Ledger is setup with Nominal Accounts created for the individual areas of you business that you need to track. The layout of your Chart Of Accounts can be altered as necessary to show your accounts in different ways. In fact, Business Builder allows you to set up as many different Charts Of Accounts as you like, so that you can view the same accounts information in different ways.

Business Builder also allows you to "drill" down into your Chart Of Accounts, so that you can see as much detail as you want to. You are even able to drill down into the Nominal Account, so you can see the individual transactions that have been included to make up the totals that you are seeing within the COA. This is a very powerful and useful business management tool. Ultimately, being able to see where you money is coming from and where it is going could be the difference between long term success or short term failure for your business. Getting it right is therefore important. If you need any advice, then please do not hesitate to contact us.


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Comments

Posted by Gordon Watson
On Thursday 17th of February 2011 09:53:35 PM

"in the chart of accounts assets are shown as credit balance and liablilities are shown as a debit balance. This is similar in the detailed chart of accounts. please reply so I can understand why or is this just a mstake?"

Posted by Md. taslim Ahmed
On Wednesday 6th of July 2011 09:49:53 AM

"Very nice.It´s help a student to about of accounting sight.accounting means debit & credit are equal."

Posted by OLADIPO OLAWALE
On Friday 18th of May 2012 01:39:50 PM

"The write-up is an eye-opener that refreshes my knowledge of those thing i was taught in college. "

Posted by tesfa
On Thursday 19th of July 2012 04:24:12 PM

"good but chart of account up to incme satement"

Posted by Lina Okunoren
On Tuesday 7th of May 2013 10:11:28 AM

"Thank you, very clear and easy to understand. "

Posted by khalid bashir
On Sunday 25th of May 2014 05:04:58 PM

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