Chart of accounts: types, characteristics and parts
What is a chart of accounts and how is it used in the business world?
In the business world it is very important to have a meticulous record of all the money coming in and going out of the organization, and how much is expected to be spent in the future.
A chart of accounts is a type of document that serves this purpose and, although it may seem like a simple paper or digital file where numbers are put, the truth is that they are essential for any company that wants to stay afloat.
Let's take a closer look at what they are, how they are made, what types of codes they use and what their structure is.
What is a chart of accounts?
A chart of accounts is a document that is used to record the operations of an organization.. In other words, it serves to establish the structure of the company when accounting for business activities.
This type of documents are very important in the field of accountingThey greatly facilitate the recording of economic transactions, systematizing all types of expenses and income that have been incurred. Normally, the catalogs of accounts are organized in the following order: assets, liabilities, capital, income, costs and expenses.
The regulations of each country allow companies to have a variable degree of freedom when preparing this type of documents, adjusting them to their needs and the most convenient way to their business reality. The size of the catalog will always depend on the complexity of the business.
What are its main advantages?
Because these types of documents are usually very flexible, the company's employees can keep a rigorous record of all the company's operations, taking into account any changes in the cash inflows and outflows of the organization..
Also, thanks to having a record, either in paper or digital format, there is a document that shows how the flow of money is occurring in the company, both when it enters and when it leaves, specifying in what form it is doing so and in what amount. Thanks to this, in case of making budgets for various purposes, it is possible to make a much more accurate estimate of what is going to be needed or spent.
How is it elaborated?
When designing a chart of accounts it is very important to find out what transactions are taking place in the business. This will provide sufficient data on the company's management.
In addition, because each country has different different countries have different regulations regarding the organization of the company and associated taxes (such as VAT or IRPF), it is important to look at the regulations in force and see if the company has anything pending to be solved. (such as VAT or personal income tax), it is important to look at the regulations in force and see if the company has anything pending to solve.
A very important aspect when drawing up a chart of accounts is the fact that must accept modifications in the futureIt can always happen that you have charged or paid for a service that has not been rendered or that you have entered some data incorrectly.
During data collection, it is very important to take the following aspects of the company into account:
- Financial data by department.
- Regional data.
- Tax obligations.
- Most important sources of income.
To facilitate the handling of data by accountants and bookkeepers, the following coding is commonly used in account catalogs:
- 1-000X for assets.
- 2-000X for liabilities.
- 3-000X for capital.
- 4-000X for revenues.
- 5-000X for costs.
- 6-000X for expenses.
As we have already seen, the chart of accounts must meet a series of characteristics so that they can be really useful for the company and its workers. Next we will see more in depth what these characteristics are.
By flexible, we mean that the chart of accounts must be able to allow must be able to allow someone to add new accounts to them, according to the company's reality..
It sometimes happens that, when this type of document is being prepared, an expense or profit is forgotten to be added. That is why, since money can never be left over in the business world, it should be recorded in the document, even if it is added later.
It is necessary that the different transactions of the organization are coded unambiguously and with as little ambiguity as possible. possible. The symbols or codes used for costs, liabilities, assets, etc., should be the least similar to each other. The idea is to avoid any confusion.
The chart of accounts should make it easy to group accounts that have some kind of relationship (e.g., expenses, liabilities, assets, etc.).(e.g., expenses on construction materials: wood, bricks, cement, etc.).
A chart of accounts should not be drawn up as if it were the Codex Calixtinus. The symbols used should be easy to memorize and manageable for the members of the company..
A chart of accounts that is prepared in such a way that the user has to consult, over and over again, what the codes or letters mean in a manual, is not functional at all.
Main types of chart of accounts
There are different types of chart of accounts depending on the type of coding system they use. The five main ones are shown below.
1. Alphabetical system
To refer to assets, liabilities, capital, income, costs and expenses, letters are used. For example, 'A' is for assets, 'B' is for liabilities, 'C' is for capital...
2. With decimal system
To refer to the different fiscal terms mentioned above, numbering from 0 to 9 is used. For example, 0 is assets, 1 is liabilities...
3. With numerical system
The catalogs of accounts that use a numerical system classify all the organization's accounts into groups and subgroups.assigning a number to each type of transaction. For example, 1 - assets, 11 - current assets, 11-10 cash...
4. With a mnemonic system
The accounts are classified in such a way that you can easily memorize the way they are referred to in the catalog. For example, for assets you can use the letter 'A' and for liabilities the letter 'P', and so on. Then, to refer to the subgroups, lower case letters are used. For example, 'Ac' could be used for current assets.
It should be said that, although it makes it easier to learn, it is rarely used in reality since there is always a small risk of ambiguity, especially between subgroups.especially between subgroups.
5. With combined system
Basically, these are account catalogs that use coding systems that combine two of the previous systems mentioned.
What is their structure?
There are three main elements of the chart of accounts.
The accounting caption is that which makes it possible to divide the company's balance sheet into different types of accounts, i.e. what are assets, what are liabilities, what are costs...i.e. what are assets, what are liabilities, what are costs...
These are each of the items that make up the assets, liabilities, capital and others.
Sub-accounts are all those elements that make up a main account.
- Marsden, S. J., (2010). Australian Master Bookkeepers Guide. 3rd ed. Sydney: CCH Australia Limited.
- Clarke, Edward A (2012). Accounting: an introduction to principles and practice, 7th Edition. Cengage Learning Australia Pty Ltd. pp. 106-109.
(Updated at Mar 28 / 2023)