What is Chart of Accounts and Why It Is Important To Your Small Business?

According to Wikipedia, a chart of accounts (COA) is a created list of the accounts used by an organization to define each class of items for which money or its equivalent is spent or received.

Chart of accounts can be picked from a standard chart of accounts generally accepted by accountants.

In other words, the chart of accounts is the record holder of your asset, liability, equity, revenue or expense. If you do the proper accounting of your small business, you can be able to inquire about your rent or salary expense for the month or for the year. Or if you wish to know your current cash balance or historical cash balance or accounts payable, then the proper classification of transactions should be employed through the chart of accounts.

Here is a simple example of a chart of accounts
ASSETS
101 Cashon Hand
102 ABC Bank
103 Accounts Receivable
104 Fixed Assets – Furnitures

LIABILITIES
200 Accounts Payable
201 Accrued Salaries
202 Interest Payable

EQUITY
300 Owner’s Capital
320 Retained Earnings

REVENUE
400 Sales Income
402 Interest Income

EXPENSES
500 Cost of Goods Sold
600 Rent
601 Salaries
602 Communication
603 Transportation Expense
604 Advertising Expense

So why is this important?

Chart of accounts brings clarity to your business. It is a way to organize spend into each category for the management to understand where spend is coming from. The more granular, the better.

If you plan to automate your accounting and business process for your small business, then the chart of accounts is the best thing to start with, because all aspects of business all dive down to a specific category on the chart of accounts that a functional area will fall that translate into a financial figure.

And that figure shall serve as business intelligence or decision that shall stabilize the organization, grow or survive.

This blog post is brought to you by our free accounting software and free payroll software Snap Solutions.

Want to learn more? Check out my Basic Accounting Terms and Definition

Or enroll in my Accounting Course Online