Chart of accounts

Ensuring that the chart of accounts is applied uniformly within a department or across a group of reporting entities requires coordination and communication. In a group structure, each reporting entity may have its own chart of accounts that is tailored to its specific operations. However, the overall structure of the chart of accounts should be consistent across the group. This can be achieved through regular communication and training, but most of all through a clear accounting manual that provides all users with an up-to-date understanding of the chart of accounts with definitions, do’s and don’ts for each account based on business practices and references to the relevant accounting policy or accounting treatment, for example.

This is all covered in the Fidugius Accounting & Reporting Manual and will ensure the correct application of the chart of accounts and result in reliable reporting of the transactions that have occurred during the period.

The benefits of the Fidugius solution for the chart of account

The chart of accounts (or COA) is a fundamental component of a company’s financial reporting system. It provides a structured framework for categorising and recording transactions, which in turn facilitates the preparation of accurate information.

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 the financial transactions that have occurred. 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. Building 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.

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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.

Permanent 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. The use of a chart of accounts manual is therefore important.

Conclusion

Ensuring consistent application of the chart of accounts, whether within a department or across a group of reporting entities, requires effective coordination and communication. In a group setting, each reporting entity may use its own customised chart of accounts tailored to its unique operations, but there should be uniformity in the overall structure of the chart of accounts across the group. Achieving this requires regular communication and training, as well as a comprehensive accounting manual that provides all users with an up-to-date understanding of the chart of accounts, including definitions, do’s and don’ts for each account based on business practices, and references to relevant accounting policies or treatments.

All of these considerations are addressed in the Fidugius Accounting & Reporting Manual, which is designed to promote accurate and reliable reporting of transactions during the reporting period by ensuring consistent application of the chart of accounts.

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