Chart of Accounts
Chart of Accounts or COA is a group of accounts managed by an institution. Such COA could be numeric, alphanumeric or alphabetical. The structure and heading of these accounts would help a lot while assorting transactions to relevant ledgers. Since each ledger account is unique, it could be easily located for reference. This formatted arrangement of accounts in financial statements, profit and loss accounts and balance sheet accounts makes it more comprehensive and easy to handle. COA is done in three processes which are nomenclature, classification and codification.
Procedure of COA
Each account is given a name and unique number with which its nature is easily identified in the Chart of Accounts. Small level businesses do not have such account numbers. These account numbers are usually in five digits with each digital position and value representing the division, department and type of account. For instance, a particular number might be assigned the first position which could be understood as the asset or liability. A gap is inserted between these numbers so that new accounts could be inserted in future.
Sub ledgers in COA
Sales, Cost of Sold Goods, Administration expenses, financial expenses and such other titles are considered as group headings where each heading has an individual and detailed ledger account. Balance sheet accounts involve asset accounts, liability accounts and stock holder’s equity accounts. Asset includes cash, bank accounts, accounts receivable, prepaid expenses, inventory, land, buildings, vehicle and equipment and accumulated depreciation. Liabilities include accounts payable, credit cards, tax payable and bank loans. Stockholder’s equity accounts include common stock, retained earnings and drawings.
Profit and loss accounts include details regarding revenue accounts, cost of goods sold accounts and expense accounts. Sales revenue, sales return and allowances and interest incomes are included in revenue accounts. Purchases and sales expenses are included in the cost of goods sold accounts. Advertising expenses, bank fees, payroll expense, rent expense, office and utility expenses are brought under the expense accounts.
The trial balance accounts are an active ledger which has debit and credit balances. Some accounts may be contra-accounts with negative balances such as accumulated depreciation and allowance for bad debts for instance. The Chart of Accounts has details regarding Inventory, Long term investments, Current liabilities, long term liabilities and equities. Information regarding sole proprietorship, partnership and corporation are found in the Chart of Accounts. The detailed information is preserved in sub ledgers which make it easier to be tracked.
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