What is a chart of accounts (COA)? Definition, examples, and how it works

Strong financial management is at the heart of every successful business. Knowing how your business is performing at any moment in time can be challenging, especially as businesses scale and collect more detailed records. Whether you’re a small business owner or managing a growing company, understanding a chart of accounts is key for accuracy and staying on top of your business’ finances. 

This article explores the concept of a chart of accounts, why this is important, and how it works. We also provide a step-by-step guide on how to create and record a chart of accounts. 

What is a chart of accounts (COA)? 

A chart of accounts (COA) is a complete list of all the different account types within a business’ general ledger. Whenever you enter a transaction into one of these accounts, the numbers ultimately flow into important financial statements like the Balance Sheet and Income Statement (also known as the Profit & Loss or P&L). 

Each transaction is placed into a specific category—revenue, equity, expenses, assets, or liabilities. Every category on the list typically has: 

• A name 

• A unique identification code (or account number) 

• A description 

• A type code 

Essentially, the chart of accounts acts like a detailed directory for your company’s finances. Having a COA makes it easier to track growth, manage obligations, and keep an eye on spending. Think of it as an essential map guiding every business toward healthy financial management. 

Is a chart of accounts the same as a balance sheet? 

Not exactly. While the COA contains everything you need to create a balance sheet, it’s still a separate document. The COA has a section for balance sheet accounts, which then feeds into the actual balance sheet. 

Why is a chart of accounts important? 

Provides a complete view of financial health  

Long-term business success relies on financial discipline. A COA gives quick access to structured financial data, helping you monitor trends, flag anomalies, and ensure sustained growth.  

This, in turn, sends more positive signals to potential investors. To secure investment, shareholders need confidence that a business can manage finances effectively. A proven record of secure company finances makes your organization a more attractive proposition for investment.  

Ensures streamlined financial processes 

For maximum business efficiency, financial processes should run smoothly. This means finance teams should be able to easily locate the required information.  

A well-structured COA means that accountants can find everything they need in a single, centralized space. They can quickly complete key tasks, such as filing tax returns while boosting efficiency to propel business growth. 

Increases organizational compliance  

With new legislation constantly arriving, financial oversight is more important than ever. Businesses must enhance compliance monitoring for their finances, for example, following the GAAP standards. This task is more difficult when financial documents are spread apart and disorganized.  

An effective COA makes compliance tracking much easier. Organizations can identify and mitigate risks before any damage is done.  

How a chart of accounts works 

A COA displays information in the same order as a financial statement.  

• Balance sheet accounts (assets, liabilities, equity) 

• Income statements (revenue, expenses) 

These main categories—assets, liabilities, equity, revenue, and expenses—always appear in this order, but each can have subcategories that get more specific. You can also group accounts by business function.  

The number of subcategories depends on what works best for your business. There’s no right or wrong—just keep your system logical and easy to follow. 

Chart of accounts structure: account types 

Let’s explore the main account types in more detail. We’ll also look at examples of different subcategories for each account type.  

Assets 

Assets are resources owned by your business and contain economic value. They are accrued via transactions and intended to benefit an organization financially. Assets are divided into current and long-term assets (sometimes known as fixed assets). 

Current assets  

Current assets are intended to be held for a short term and are generally expected to be sold or used within a year. Examples of current asset subcategories are stock, supplies, cash, short-term debt, and short-term investments.   

Long-term assets  

Long-term assets, as the name suggests, are held for longer periods. Examples of long-term subcategories include plant and equipment, land, long-term investments, vehicles, and office buildings. 

Liabilities 

Liabilities are resources (usually money) owed by your business. As with assets, liabilities can be broken into two groups. These are current and long-term liabilities.  

Current-term liabilities  

If your obligation is due within a year, this is usually classed as a current-term liability.  Examples of current liability subcategories include accounts payable, payroll, taxes,  interest payments, rental fees, and expenses due in the short term.  

Long-term liabilities  

If your obligation isn’t due within a year, this is a long-term liability. Examples of long-term liability subcategories are long-term loans, mortgage payments, bonds, employee pensions, and deferred tax liabilities.  

Equity 

When a stakeholder invests in your company, it is known as equity. Equity is calculated by deducting liabilities from your business’ total assets. Examples of subcategories within equity include common shares, employee equity, and preferred shares. 

Revenue 

Revenue is any income that your business generates. Maintaining accurate accounts of revenue is essential for monitoring business performance. Revenue can be broken into several subcategories. These include sales of goods and products, sales of services, and income from rent. 

Expenses 

The expenses account is a record detailing the outflow of money or use of business assets. This can include many different areas. Examples of subcategories include paid debt, use of assets, rent, employee wages, and taxes paid. 

Cash basis vs. Accrual chart of accounts 

To clearly understand the structure of a chart of accounts, let’s have a look at the two accounting methods: Cash basis and accrual accounting. 

What’s included in a cash basis chart of accounts? 

In cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when cash is paid. This method focuses on actual cash flow, making it simpler and more straightforward. 

The chart of accounts for cash basis accounting will primarily include accounts that track cash transactions, such as cash on hand, bank accounts, and immediate expenses. It may not include accounts for receivables or payables since these are not recognized until cash changes hands. 

What’s included in an accrual basis chart of accounts? 

Accrual basis accounting records revenue when it’s earned and expenses when they’re incurred, regardless of when cash is exchanged. It provides a more accurate picture of a company’s financial health over time. 

The chart of accounts for accrual basis accounting is more comprehensive. It includes accounts for receivables, payables, accrued expenses, and deferred revenue. This allows for better tracking of financial obligations and income that have been incurred but not yet realized in cash terms. 

How are they different? 

Accrual basis accounting requires a more detailed chart of accounts to capture all financial transactions, including those that do not involve immediate cash flow. 

The accrual method’s chart of accounts also supports more detailed financial reporting and compliance with accounting standards like GAAP, which is often required for larger businesses. 

How to create a chart of accounts 

Let’s explore how you can build your chart of accounts in four simple steps.   

1. Identify business needs  

Every business runs its finances differently, so start by looking at how yours operates. Consider factors such as your business size and industry. More importantly, think about the types of transactions that you handle regularly.  

With a strong understanding of your business’ financial operations, you’ll have a clearer idea of a COA structure that best fits your organization.  For example, if your organization is growing with larger and more complex financial systems, the accrual basis chart of accounts is the right choice. 

2. Categorize accounts  

Sort all your transactions into the five main groups: assets, liabilities, equity, revenue, and expenses. Then think about subcategories—for instance, if you have multiple product lines or services, you can set up sub-accounts to track each one. 

3. Assign account numbers  

Adopt a logical numbering system that reflects the structure of your organization’s finances. Usually, assets begin with the number 1; liabilities with 2; net assets with 3; revenue with 4, 5 or 8; and expenses with 6, 7 or 9: 

Assets 

• 1000 – Current assets 

• 1100 – Checking 

• 1200 – Accounts receivable 

• 1300 – Non-current assets 

• 1400 – Property 

• 1500 – Equipment 

Liabilities 

• 2000 – Current liabilities 

• 2100 – Accounts payable 

• 2200 – Short-term loans 

• 2300 – Long-term liabilities 

• 2400 – Long-term debt 

Net assets 

• 3000 – Unrestricted net assets 

• 3100 – Temporarily restricted net assets 

• 3200 – Permanently restricted net assets 

Revenue 

• 4000 – Earned revenue 

• 5000 – Contributed revenue 

• 8000 – Other revenue accounts 

Expenses 

• 6000 – Personnel expenses 

• 7000 – Non-personnel expenses 

• 9000 – Other expenses 

Note that there is no universal rule to numbering your accounts. While many businesses use a four-digit system, many organizations prefer a two or three-digit system, especially if they’re smaller or have fewer accounts.  

4. Describe accounts  

Finally, add a name or label for each account, along with a clear description. Aim for clarity and consistency so your whole team can navigate the COA without confusion.  

Customizing a chart of accounts 

Every chart of accounts is unique to each business. It’s important to customize your COA to your individual needs. Consider the following points: 

Tailor to business size and type 

The contents of your COA depend partly on the size of your business. The larger your business, the more complexity you’ll see in your transactions. This is likely to require greater data organization to be reflected in a more extensive COA. 

Similarly, some types of businesses might demand more extensive disclosure due to legal obligations compared to others. In some jurisdictions, these might vary depending on the size of your business. This, too, can have an impact on your COA design. 

A service-based business might require additional entries in the COA to distinguish between the various services provided. A business manufacturing products might require a range of COA entries for each product or category. 

Industry-specific accounts 

All COAs share the five main account types, but subcategories can be whatever you need them to be. For instance, a consultancy may want subcategories like: 

• IT consultancy 

• Project management consultancy 

• Strategic planning consultancy 

• Financial consultancy 

Meanwhile, a manufacturing business might break its inventory down into: 

• Cost of Good Sold (that includes raw materials, direct labor, manufacturing overhead) 

• Packaging materials (for example, boxes and pallets) 

• Safty stock 

• Office furniture 

• Kitchen and bathroom goods 

• Soft furnishings 

Managing and updating a chart of accounts 

Your chart of accounts is a living document and will grow alongside your business. This means that it must be properly maintained and adjusted over time. Of course, it’s easy to make mistakes during this process. Therefore, managing and updating your chart of accounts requires extra attention. 

Regular review 

As your COA details more and more accounts, there is a risk of it becoming unmanageable. Staff might make mistakes during data entry, affecting the integrity of your document.  

Schedule a regular audit to cross-check accounts and ensure everything stays accurate. Ledger accounting software can make this much faster and easier. 

Adjusting for growth 

Whenever you open a new account (like a fresh loan or a new service line), remember to add it to the COA so that nothing falls through the cracks. You may also need to update who has access to sensitive information as your team grows. 

Avoiding common pitfalls 

Be sure to avoid some of the following pitfalls when managing your document.  

• Overlooking industry or regulatory changes: Stay current on any shifts in your industry that affect how you track finances. Changes can introduce new accounting standards and requirements. 

• Creating unclear account names: Account names must be accessible and easily discoverable. Choose descriptive names that are to the point. 

• Forgetting to update: Set a specific schedule for COA updates so you don’t let them slip. 

Chart of accounts examples 

Certain aspects of a chart of accounts, like cash, will be common to most businesses. In terms of business types, a manufacturing company may, for example, need to break its assets down in more detail than a professional services firm. 

Example COA for a manufacturing business 

A sample chart of accounts for a manufacturing business might look like this: 

Identifier	Account description	Account type	Statement
1100	Current assets	Current assets	Balance sheet
1101	Checking account	Current assets	Balance sheet
1102	Accounts receivable	Current assets	Balance sheet
1200	Long-term assets	Long-term assets	Balance sheet
1210	Buildings	Long-term assets	Balance sheet
1220	Plant and machinery	Long-term assets	Balance sheet
1230	Fleet vehicles	Long-term assets	Balance sheet
1240	Distribution warehouses	Long-term assets	Balance sheet

Example COA for a consulting business 

Below is an extract of a chart of accounts template for a consulting business. This  company might need to break down its services in more detail: 

Identifier	Description	Account type	Statement
4000	Revenue	Revenue	Profit and loss
4100	IT consultancy	Revenue	Profit and loss
4200	Financial consultancy	Revenue	Profit and loss
4300	Project management consultancy	Revenue	Profit and loss
4400	Strategic consultancy	Revenue	Profit and loss
6000	Personnel expenses	Expenses	Profit and loss
7000	Professional fees	Expenses	Profit and loss

You will notice that each entry is preceded by an identification code. These codes group items into logical categories. Each of these categories will be allocated a number range. This is vital for large numbers of transaction types to ensure they can easily be identified and allocated to correct ledger totals and financial statements. 

As well as a description of the account, the above example chart of accounts lists the account type and applicable financial statement for easy reference. 

Chart of accounts best practices 

A COA is a valuable document but relies on accuracy and completeness. With that in mind, let’s explore some best practices for building your COA. 

Software compatibility  

Modern accounting has progressed from paper documents and manual processes. Businesses deploy various forms of financial management software to simplify accounting. This can help analyze your accounts and suggest methods for improving accountancy. 

However, to use these features, accounts must link seamlessly with software. Make sure that your chart of accounts can integrate with your business tools. Your COA should align with your ledger’s financial information and pull data smoothly. A mismatch could potentially lead to problems later down the line.  

Luckily, modern financial management software improves consistency throughout your accounts.  

Avoid creating too many accounts  

A chart of accounts should be a simple overview of all your accounts. A viewer should be able to find relevant information at a glance. This becomes more challenging when COAs become bloated with too much information. The best way to avoid information overload is to create a more minimalistic approach to accounts.  

Not all transactions require the creation of new accounts. Creating a new record is unnecessary if a transaction fits within an existing account.   

Aim for the highest levels of data accuracy  

A COA is only as useful as the data that it contains. Data errors such as duplicate or incorrect entries can have damaging long-term consequences. The best way of guaranteeing high data accuracy is through regular assessments of your COA. Finding and correcting errors early can ensure sustained data integrity.  

Accounting software can help to minimize mistakes and ensure accuracy by automatically updating accounts without the risk of human error. The solutions alert the finance team of any mistakes and remove inconsistencies.  

Handle your chart of accounts efficiently with financial management solutions 

Your chart of accounts is the backbone of your financial operation. But as we’ve explored, guaranteeing quality isn’t always easy. 

Sage offers comprehensive accounting software to simplify the recording process of your chart of accounts while delivering consistency and efficiency. We’ll assist in building your COAs in numerous ways, including:  

• Customize your COA by creating new charts or modifying templates to match your exact needs. 

• Organize data in a single place so you can see your income, expenses, assets, liabilities, and capital at a glance. 

• Import/export easily to and from spreadsheets, which is handy if you’re switching from another platform. 

• Generate reports that pull insights directly from your COA, so you can make informed decisions quickly. 

• Set up your COA in just a few steps, including defining general ledger defaults and entering opening balances. Adding new accounts is a breeze. 

Chart of accounts FAQs 

Is there a single COA format? 

There is no single COA format. A chart of accounts format is chosen by a company. Whatever format you choose, be sure to aim for consistency. Follow the same approach for all your accounts to ensure accuracy and reliability. 

Is a chart of accounts required? 

There is no legal requirement to create a chart of accounts. It is, however, a highly recommended document for managing finances effectively.  

How can a COA help my business decisions? 

A COA ensures quick access to business financial information. It can assist businesses with many aspects of finances, from clients to spending. Perhaps most importantly, it can provide an overview of your financial health.  

What’s the difference between a general ledger and a chart of accounts? 

The chart of accounts contains a list of all transaction types grouped logically. A general ledger contains the transaction values for each of these groups.