The chart of accounts is a document that consists of an ordered list of all the accounts or items that are used in the accounting record of a company. The list includes the ordered accounts of assets, liabilities, stockholders’ equity, income and expenses of the company.
In other words, a chart of accounts is a compendium of the accounting items that a company uses to report its activities.
Specifically, the chart of accounts is prepared in order to be able to easily identify each account in the accounting system. This purpose is achieved by placing a name or a number corresponding to each account that is part of the business accounting. This helps their easy identification.
Likewise, a brief description of the use and general operation of the accounting books is placed in the list of the chart of accounts. This favors the classification of each account. Also, it serves as an account manual within the organization.
What is the chart of accounts used for?
The chart of accounts is used primarily to:
- Ensure that all employees involved can carry out accounting records that are consistent and orderly.
- Make the work of the accounting system easier, especially when what is sought is to make a consolidation of financial and accounting data.
- Carry out a daily record of the accounting operations of a company. This will help in the correct preparation of the company’s financial statements.
What are the objectives of the chart of accounts?
The objectives pursued by the development of a chart of accounts are:
- Prepare a permanent written rule that helps to avoid errors in the classification of the different accounts.
- Properly structure the accounting system. This, since it serves as a reference for the registration, classification and application of financial and accounting activities.
- Serve as a foundation for the analysis process and the uniform recording of accounting and financial operations.
- To be used as a guide for the preparation of financial statements and the preparation of budgets.
- To be used as a base element when the accounting process is carried out using computerized means.
- Serve as a base or simple manual that does not require highly specialized personnel for its use. Above all, in the financial and accounting area.
Why is the chart of accounts important?
Undoubtedly, a chart of accounts is important because it allows unifying criteria to classify the record of an organization’s accounting operations. This makes it easier for the record to be carried out in a uniform manner, making it the basis of the accounting system.
However, it is important that the chart of accounts maintain a degree of flexibility. This, with the purpose of achieving that when the company grows or expands it can adapt to that growth process.
Naturally, the flexibility of the chart of accounts will allow it to be adapted to business operations. The order will be achieved according to the needs of the company.
For that reason, it is required that the design of the chart of accounts be clear, so that managers, accountants, assistants and users understand it. You should allow the process of incorporating new accounts to be easy, without making modifications.
Otherwise, this could cause:
- Confusion in the accounting criteria to follow.
- Duplication or reprocessing.
- Obligation to modify accounting computer programs.
- Loss of information.
- Errors in the preparation of financial statements.
How is a chart of accounts structured?
The structure of a chart of accounts is made up of three levels: item, account and subaccount.
To begin with, the item is an accounting section that allows grouping different accounts. The item identifies the names received by all the divisions of the operations that make up the financial structure of the company that orders its accounting movements. It could be structured in assets, liabilities and collections.
Next, the accounts are structured. The account includes all the divisions that make up each item. Every accounting account is used to record the accounting movements that have been made and that have an impact on the company. For example, the asset could be classified in cash, banks, suppliers, customers, among some that can be mentioned.
Finally, we find the subaccounts. The subaccount is the accounting term linked to the detailed breakdown of all accounts. This generates the final record of the chart of accounts. The subaccounts are used to detail and control the accounting operations that the company does. For example, the petty cash subaccount is used in the cash account or the banking entities subaccount in the bank account.
Types of account catalogs
The types of account catalogs are:
The numeric account catalog type assigns a number in progressive order to each account. To do this, account groups must be created in accordance with the structure of the financial statements.
This type consists of grouping the accounts of a company using digitized decimal numbers. To do this, account groups must first be created in accordance with the structure of the company’s financial statements. Each group must be divided into a maximum of ten categories.
Alphabetics assigns a letter of the alphabet to each of the beads. The groups of accounts based on the financial statements of the company must always have been previously formed.
In this type, the initial letters of the groups and subgroups are used. Now, if there are two groups with the same initial letter, a number is used in addition to the first initial letter. This, with the purpose of being able to differentiate and thus facilitate the identification process.
The combo uses two or more of the above types.
To conclude, the chart of accounts is very important because it allows the company’s accounting information to be recorded in a uniform manner.