Question

What is a chart of accounts? Why is it important to develop a chart of accounts? What impact on a company would there be if a company's chart of accounts has errors or one was not developed? Provide 3 specific examples.

Answer 1

The chart of accounts is a listing of all accounts used in the general ledger of an organization. The chart is used by the accounting software to aggregate information into an entity's financial statements. The chart is usually sorted in order by account number, to ease the task of locating specific accounts. The accounts are usually numeric, but can also be alphabetic or alphanumeric.

The Chart of Accounts (COA) of a business is important because it helps to tell the story of your business financially.

This might be an easy way to think about it. Think of the General ledger as the entire book (complete financials of your business), the Chart of Accounts is the table of contents of that book, the ledger accounts are the chapters of that book, the subsections of the book are the ledger sub accounts, and the words that make up the chapters in the book are the individual financial transactions.

All of the accounts (chapters) that are listed on the COA make up both the Balance Sheet and Income Statement (also known as the P&L or Profit and Loss). The Balance Sheet is basically the Accounting Equation which is made up of the ledger accounts assets, liabilities, and shareholder’s equity. The accounting equation is Assets = Liabilities + Shareholders Equity (or also known as Owner’s Equity, depending on the type of business structure). The Income Statement is the Net Income equation which is made up of the ledger accounts revenues and expenses. That equation is Revenues - Expenses = Net Income. So, you can see why the Chart of Accounts is so handy when it comes to organizing all the Balance sheet and Income Statement transactions for your business.

In conclusion, the Chart of Accounts is an organized way for a business to keep track of all of the account details that make up the Balance Sheet and the Income Statement. Which, in turn, helps to show the financial health of your business.

If company chart of accounts has errors or it is not developed then

1) Increase the reconciliation procedures

2) Increases effort to consolidate information to satisfy management requests

3) lack of consistency of reported information across business units and does not ensures compatibility.

4) company lose the ability to leverage staff between different business units perfectly.

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