What is a chart of accounts & is it important?
Keeping track of all the money moving in and out of your business can be a challenge, but its important for anyone who wants an insight into their cash flow, as well as an overview of the general financial health of their company. Thats why a chart of accounts can be a beneficial addition to your financial analytics tools. Explore the definition of a chart of accounts and find out why a chart of accounts is important with our comprehensive guide. In short, its an index of all the financial accounts in your companys general ledger. It allows you to break down all the transactions that your business made during a specific period into different subcategories. By separating out your revenue, liabilities, assets, and business expenditures, a chart of accounts enables you to gain insight into the effectiveness of different areas of your business. In a chart of accounts, accounts are shown in the order that they appear on your financial statements. Consequently, assets, liabilities, and shareholders equity (balance sheet accounts) are shown first, followed by revenue and expenses (income statement accounts). Within your chart of accounts, these broad categories are likely to have a significant number of subcategories. For example, assets can include the following sub-accounts:  Accounts receivable  Cash  Prepaid expenses  Inventory  Fixed assets  Petty cash  Marketable securities  Allowance for doubtful accounts  Accumulated depreciation  Liabilities may also be broken down into these sub-accounts:  Accounts payable  Wages payable  Notes payable  Taxes payable  Accrued Liabilities  While shareholders equity may consist of the following sub-accounts  Preferred stock  Retained earnings  Common stock  Furthermore, you may decide to structure your chart of accounts so that revenue and expenses is categorised according to business function, product line, or company division. Each account on the chart of accounts contains an identification code, description, and name. This makes it easier to locate specific accounts, as a chart of accounts can get complex, especially for very large companies. For an international corporation with multiple divisions, the chart of accounts may even include thousands of individual financial accounts. Understanding why a chart of accounts is important  The chart of accounts is important for several reasons. Most importantly, it provides you with a clear picture of the financial health of your company. This is useful not just for business owners, but also investors and shareholders who may not have a handle on your companys day-to-day operations. It also makes it easier for businesses to comply with financial reporting standards, which makes a chart of accounts extremely beneficial for businesses of all sizes. Chart of accounts example  There are a broad range of chart of account examples available online, which can give you a better sense of what this important financial document should look like. Weve also put together a partial chart of accounts example (remember, these documents can be extremely complex) for you to take a look at:  Account Category Sub-account Account number Balance sheet Assets Accounts receivable 1001 Cash 1002 Inventory 1003 Fixed Assets 1004 Liabilities Accounts payable 1005 Wages payable 1006 Shareholders equity Common stock 1007 Retained earnings 1008 Income statement Revenue Operating revenue 2001 Non-operating revenue 2002 Expenses Operating expenses 2003 Non-operating expenses 2004  How to improve your chart of accounts  When youre producing a chart of accounts in Australia, consistency is key. Try to make a chart of accounts that wont change for several years so that you can more easily compare results. If you keep adding new accounts, then it will become increasingly difficult to compare your financial information over a multi-year period. You should also regularly review the chart of accounts to see if any accounts contain inessential data. If they do, shut down these accounts to keep the chart at a manageable size. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.