Accounting – Chart of Accounts in Accounting

What Is a Chart of Accounts in Accounting?

A chart of accounts, commonly abbreviated as COA, is an organized list of the general ledger accounts used by a business to record financial transactions. Each account is assigned a descriptive title and, in many accounting systems, a unique account number.

The chart of accounts provides the structure for classifying transactions before they are posted to the general ledger. It helps ensure that similar transactions are recorded consistently and that balances can be grouped correctly when preparing financial statements.

Why a Chart of Accounts Is Used

A well-designed chart of accounts helps a business:

• classify assets, liabilities, equity, revenue, and expenses;
• prepare journal entries using consistent account names and numbers;
• summarize balances in the general ledger;
• prepare the balance sheet and income statement;
• compare financial results between accounting periods;
• reduce duplicate or unclear account names; and
• organize records in computerized accounting systems.

The chart of accounts does not contain individual transactions. Instead, it identifies the accounts into which transactions will be posted.

Five Main Account Types in a Chart of Accounts

Most business charts of accounts are built around five main account types. These categories correspond to the elements commonly reported in financial statements.

Account type	What it represents	Typical financial statement	Examples
Assets	Resources owned or controlled by the business	Balance sheet	Cash, inventory, equipment
Liabilities	Amounts owed to other parties	Balance sheet	Accounts payable, loans payable
Equity	The owner’s or shareholders’ interest in the business	Balance sheet	Capital, share capital, retained earnings
Revenue	Income earned from business activities	Income statement	Sales revenue, service revenue
Expenses	Costs incurred to earn revenue and operate the business	Income statement	Rent, salaries, advertising

Some organizations use additional reporting categories, such as gains, losses, contra accounts, or other income. These are usually subdivisions of the five main account types rather than replacements for them.

How Chart of Accounts Numbers Are Assigned

Account numbering makes it easier to identify an account’s category and position in the ledger. A business can choose its own numbering system, but the system should remain consistent.

For example, a small business might use the following number ranges:

Number range	Account category
100-149	Assets
150-199	Liabilities
200-249	Expenses
250-299	Equity
300-349	Revenue

This is only an illustrative structure. Many organizations use four-digit, five-digit, or longer account codes so that additional accounts and subaccounts can be inserted later.

Chart of Accounts List with Examples

The following chart of accounts example shows how accounts may be grouped and numbered for a small business.

Asset Accounts

Account number	Account title	Account purpose
100	Cash	Money held in cash or bank accounts
101	Accounts Receivable	Amounts owed by customers
102	Inventory	Goods held for sale
103	Land	Cost of land owned by the business
104	Building	Cost of business buildings
105	Machine	Cost of production machinery
106	Prepaid expenses	Expenses paid before the related benefit is received
107	Equipment	Cost of equipment used by the business
108	Office Supplies	Unused office supplies on hand

Liability Accounts

Account number	Account title	Account purpose
150	Accounts payable	Amounts owed to suppliers
151	Salaries	Salaries owed but not yet paid
152	Sales tax payable	Sales taxes collected and owed to the relevant authority
153	Bills Payable	Formal payment obligations due to creditors
154	Bank overdraft	Amount by which withdrawals exceed the bank balance
155	Outstanding expenses	Expenses incurred but not yet paid
156	Income received in advance	Customer payments received before revenue is earned
157	Long term loans	Borrowings generally due after more than one year

In a detailed chart of accounts, a title such as “Salaries” would normally be clarified as “Salaries Payable” when it represents a liability. “Salaries Expense” would be maintained separately under expenses.

Expense Accounts

Account number	Account title	Account purpose
200	Delivery expenses	Costs of delivering goods to customers
201	Advertisements	Advertising and promotional costs
202	Depreciation expenses	Periodic allocation of a depreciable asset’s cost
203	Rent expenses	Cost of rented premises or equipment
204	Insurance expenses	Insurance cost applicable to the accounting period
205	Store supplies expenses	Cost of store supplies consumed
206	Credit card expenses	Credit card processing fees and related charges
207	Interest expenses	Cost of borrowing money
208	Miscellaneous expenses	Minor expenses that do not justify a separate account

Equity Accounts

Account number	Account title	Account purpose
250	Capital /Share capital	Amounts invested by owners or shareholders
251	Retained Earnings	Accumulated profits retained in the business
252	Dividends	Distributions declared or paid to shareholders

Revenue Accounts

Account number	Account title	Account purpose
300	Sales	Revenue earned from selling goods
301	Rent Revenue	Revenue earned by renting property or equipment

Current, Noncurrent, Operating, and Nonoperating Accounts

The five main account types can be divided further to improve financial reporting. Assets and liabilities may be classified as current or noncurrent. Revenue and expenses may be classified as operating or nonoperating.

• Current assets include cash, accounts receivable, inventory, and other assets expected to be used, sold, or converted into cash within the applicable operating cycle.
• Noncurrent assets include land, buildings, machinery, and other long-term resources.
• Current liabilities include accounts payable, accrued expenses, and other obligations expected to be settled in the near term.
• Noncurrent liabilities include long-term loans and other obligations due beyond the current period.
• Operating accounts relate to the principal activities of the business, such as sales revenue and delivery expense.
• Nonoperating accounts relate to secondary activities, such as interest income or interest expense.

Contra Accounts in the Chart of Accounts

A contra account is linked to another account but carries the opposite normal balance. It is used to show an adjustment without removing the original account balance.

Contra account	Related account	Purpose
Accumulated Depreciation	Building, machinery, or equipment	Records total depreciation recognized to date
Allowance for Doubtful Accounts	Accounts Receivable	Estimates receivables that may not be collected
Sales Returns and Allowances	Sales Revenue	Records reductions in sales caused by returns and allowances
Owner’s Drawings or Dividends	Owner’s Capital or retained earnings	Records distributions that reduce equity

How Transactions Use the Chart of Accounts

When a transaction occurs, the accountant selects the appropriate accounts from the chart of accounts and records the debit and credit amounts in a journal entry.

For example, suppose a business purchases $1,200 of equipment for cash. The transaction affects the Equipment and Cash accounts.

Account	Debit	Credit
Equipment	$1,200
Cash		$1,200

Equipment increases with a debit, while Cash decreases with a credit. Both accounts are selected from the asset section of the chart of accounts.

How to Create a Chart of Accounts for a Small Business

1. Identify the required account categories. Begin with assets, liabilities, equity, revenue, and expenses.
2. List accounts used by the business. Include accounts that reflect actual transactions, such as cash, sales, inventory, rent, and accounts payable.
3. Separate balance sheet and income statement accounts. Assets, liabilities, and equity appear on the balance sheet, while revenue and expenses appear on the income statement.
4. Assign logical number ranges. Reserve a range for each account type and leave gaps for future accounts.
5. Use clear account titles. An account name should describe what is recorded in it without being unnecessarily broad.
6. Avoid duplicate accounts. Check whether an existing account already serves the intended purpose before adding a new one.
7. Add subaccounts only when useful. For example, Utilities Expense may be divided into Electricity Expense and Water Expense when separate reporting is needed.
8. Review the structure periodically. Inactive, duplicate, or obsolete accounts may need to be disabled or consolidated, subject to record-retention requirements.

Chart of Accounts Design Example with Subaccounts

A larger numbering structure can accommodate main accounts and subaccounts. For example:

Account code	Account title	Classification
1000	Cash and Cash Equivalents	Main asset account
1010	Petty Cash	Cash subaccount
1020	Checking Account	Cash subaccount
1100	Accounts Receivable	Current asset
2000	Accounts Payable	Current liability
4000	Operating Revenue	Main revenue account
4010	Product Sales	Revenue subaccount
4020	Service Revenue	Revenue subaccount
5000	Operating Expenses	Main expense account
5010	Rent Expense	Expense subaccount
5020	Utilities Expense	Expense subaccount

Subaccounts provide detail while preserving a consistent hierarchy. The level of detail should match the reporting needs of the organization.

Common Chart of Accounts Mistakes

• Creating too many accounts: Excessive detail makes transaction coding difficult and produces reports that are harder to interpret.
• Using vague account names: Titles such as “General,” “Other,” or “Miscellaneous” can conceal the nature of transactions when used too often.
• Combining assets and expenses: Equipment owned by the business should not automatically be recorded in the same account as routine equipment repairs.
• Using one account for different purposes: Salaries Payable and Salaries Expense represent different financial statement elements and should normally be separate.
• Renumbering accounts without a plan: Frequent changes can disrupt historical comparisons, reporting rules, and accounting software mappings.
• Deleting accounts with transaction history: An unused account is generally made inactive rather than erased when historical records must be preserved.

Chart of Accounts and the General Ledger

The chart of accounts and the general ledger are related but are not the same record. The chart of accounts is the index of available accounts. The general ledger contains the transactions and balances recorded under those accounts.

Chart of accounts	General ledger
Lists account names and account numbers	Contains debits, credits, and account balances
Defines the accounting structure	Records financial activity within that structure
Usually changes only when accounts are added, renamed, or made inactive	Changes whenever transactions are posted
Does not normally show individual transactions	Shows transaction-level or summarized posting details

Frequently Asked Questions About the Chart of Accounts

What are the five basic categories in a chart of accounts?

The five basic categories are assets, liabilities, equity, revenue, and expenses. These categories organize accounts according to the financial statement element they represent.

What is an example of a chart of accounts number?

A business might assign account number 1000 to Cash, 2000 to Accounts Payable, 3000 to Owner’s Capital, 4000 to Sales Revenue, and 5000 to Rent Expense. The exact numbers depend on the organization’s accounting structure.

Does every company use the same chart of accounts?

No. A chart of accounts is adapted to the organization’s activities, legal structure, reporting requirements, accounting framework, and software. A retailer may require inventory and cost-of-sales accounts, while a service business may not.

Can a chart of accounts contain more than five account types?

Yes. A detailed chart may separately present cost of sales, other income, gains, losses, contra accounts, or statistical accounts. However, financial accounts are still generally connected to the main categories of assets, liabilities, equity, revenue, and expenses.

Chart of Accounts Editorial Review Checklist

• Confirm that every listed account belongs to the correct asset, liability, equity, revenue, or expense category.
• Verify that liability titles such as Salaries Payable are not confused with expense titles such as Salaries Expense.
• Check that account number ranges are internally consistent and leave room for additional accounts.
• Confirm that contra accounts are identified separately from the accounts they offset.
• Review journal-entry examples to ensure total debits equal total credits.
• Ensure that the chart contains enough detail for reporting without creating unnecessary duplicate accounts.