Chart of accounts

A chart of accounts is only useful if it is applied consistently. In organisations with multiple departments or reporting entities, that is harder than it sounds. Each entity may have its own account structure tailored to local operations, but without a shared understanding of definitions, inclusions and exclusions, the same transaction ends up recorded differently depending on who processes it.

Achieving consistency requires more than structure alone. It requires clear documentation: definitions, do’s and don’ts for each account, references to relevant accounting policies and booking procedures, all accessible to the people who need them at the moment they need them.

CHART OF ACCOUNTS OBJECTIVE

The objective of a chart of accounts is to provide a standardised and organised system for recording financial transactions. It is essentially a list of all the accounts that a company uses to record its activities. Until recently, this related solely to financial transactions. Nowadays it also includes the recording of environmental and social activities.

The chart of accounts has several aggregation levels. For example, the category non-current assets may consist of intangible assets and property, plant and equipment. Property, plant and equipment may subsequently include the aggregation levels Land, Buildings, Machinery, Vehicles and Office equipment. Buildings may comprise the categories Office buildings and Factories. Office buildings may eventually include multiple accounts specifically related to a certain office location. In case transactions occur for an office location, the costs are recognised on that specific account. All financial accounts within the COA result in a company’s balance sheet and income statement.

Depending on the user’s information needs, reporting is done at the specific aggregation level. A facility manager may wish to review each office location. An investor may only be interested in the main categories of property, plant and equipment.

HOW TO SET UP THE COA?

Setting up a chart of accounts requires careful consideration of the company’s business activities. The accounts should be organised in a logical manner that reflects the nature of the company’s operations. For example, a retail company might have accounts for sales revenue, cost of goods sold, inventory and rent expense. A manufacturing company might have accounts for raw materials, labour costs and manufacturing overhead.

The following factors should be considered when setting up a COA:

Account types: Accounts can be categorised into different types, such as assets, liabilities, equity, revenue, and expenses. This categorisation helps to group similar accounts together and facilitates the preparation of financial statements.
Account hierarchy: Accounts can be organised in a hierarchical structure that reflects the relationships between accounts. This hierarchy can be used to roll up account balances into higher-level categories, such as subtotals and totals.
Numbering system: A numbering system is used to assign a unique number to each account in the chart of accounts. The numbering system should be logical and consistent, making it easy to understand and navigate the chart of accounts.
Account descriptions: Each account in the chart of accounts should have a clear and concise description that accurately reflects its purpose and use. This helps to ensure that transactions are recorded in the correct accounts and facilitates understanding of the financial statements.
Currency and location: In a multinational company, it is important to consider the currency and location of each account in the chart of accounts. This helps to ensure that financial statements accurately reflect the financial position and performance of each reporting entity.

COA MAINTENANCE

Once the chart of accounts has been established, it is important to maintain it on an ongoing basis. This includes adding new accounts as necessary, modifying existing accounts to reflect changes in the business, and deleting accounts that are no longer relevant. Proper maintenance of the chart of accounts is essential for accurate reporting and requires a clear and accessible chart of accounts manual that stays current over time.

HOW FIDUGIUS SUPPORTS CHART OF ACCOUNTS DOCUMENTATION

In practice, many organisations have a chart of accounts — but not the documentation to go with it. Definitions are implicit. Booking instructions exist informally. New employees learn by asking colleagues rather than consulting a structured source.

The Fidugius Financial Accounting & Reporting Manual documents the chart of accounts in a structured, searchable platform: definitions, inclusions, exclusions, do’s and don’ts, and direct links to related accounting policies and booking procedures. It gives everyone working with the COA, across departments and entities, the same frame of reference.

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Chart of accounts Fidugius