Chart Of Accounts: Types, Characteristics And Parts
In the business field it is very important to have a meticulous record of all the money that enters and leaves the organization, and how much is expected to be spent in the future.
A chart of accounts It is a type of document that serves to fulfill this purpose and, although it may seem like a simple paper or digital file where numbers are entered, the truth is that they are essential for any company that wants to continue staying 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.
A chart of accounts is a document that is used to record the operations of an organization That is, it serves to establish the structure of the company when accounting for business activities.
This type of documents They are very important in the field of accounting , since they greatly facilitate the registration of economic transactions, systematizing all types of expenses and income that have been made. Typically, charts of accounts are organized in the following order: assets, liabilities, capital, revenues, costs and expenses.
The regulations of each country mean that companies have a variable degree of freedom when preparing this type of documents, adjusting them to their needs and the most convenient way for their business reality. The size of the catalog will always depend on how complex the business is.
Thanks to the fact that these types of documents are usually very flexible, the company’s workers can keep a rigorous record of all its operations, taking into account any changes in money coming in and going out of the organization
Also, thanks to having a record, whether in paper or digital format, you have a document that demonstrates how the flow of money is occurring in the company, both when it enters and when it leaves, specifying how it is doing so and in what quantity. Thanks to this, in case of making budgets for various purposes, it is possible to make a much more precise estimate of what will be needed or what will be spent.
As elaborated?
When designing a chart of accounts it is very important to find out what transactions are taking place in the business. In this way there will be sufficient data on the company’s administration.
Furthermore, because Each country has different regulations regarding the organization of the company and associated taxes (such as VAT or personal income tax), it is important to look at the current regulations and see if the company has anything pending to solve.
A very important aspect when preparing a catalog of accounts is that must accept modifications in the future since it can always happen that a service has been charged or paid for that in the end has not been provided or some data has been entered incorrectly.
During data collection, It is very important to take into account the following aspects of the company :
To facilitate the handling of data by accountants and account bookkeepers, it is common to use the following coding in catalogs of accounts:
As we have already seen, charts of accounts must have a series of characteristics so that they can be truly useful for the company and its workers. Below we will see in more depth what these characteristics are.
1. Flexibility
By flexible we mean that the charts of accounts They must be able to allow someone to add new accounts to them, in accordance with the reality of the company
Sometimes it happens that, when these types of documents are being prepared, some expenses or profits are forgotten to be added. That is why, given that there is never enough money in the business world, it must be recorded in the document, even if it is added later.
2. Accuracy
It is necessary that the different transactions of the organization are codified unambiguously and with minimal ambiguity possible. The symbols or codes used for costs, liabilities, assets, etc., should be as similar as possible to each other. The idea is to avoid any type of confusion.
3. Rational
The charts of accounts They should make it easier to group accounts that have some type of relationship (e.g. expenses on construction materials: wood, bricks, cement…)
4. Simplicity
A catalog of accounts should not be prepared as if it were the Codex Calixtinus. The symbols used must be easy to memorize and manageable for the members of the company
An account catalog that is prepared in such a way that the user has to consult, over and over again, what the codes or letters in a manual mean is not at all functional.
Main types of charts of accounts
There are different types of charts of accounts depending on the type of coding system they use. Below are the top five.
Letters are used to refer to assets, liabilities, capital, income, costs and expenses. For example, ‘A’ is for assets, ‘B’ is for liabilities, ‘C’ is for equity.
2. With decimal system
To refer to the different tax terms mentioned above, numbering from 0 to 9 is used. For example, 0 is assets, 1 is liabilities…
3. With numerical system
The charts of accounts they use A numerical system classifies 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 mnemonic system
The accounts are classified so that it can be easily memorized the way in which they are referred to in the catalogue. For example, for assets you can use the letter ‘A’ and for liabilities the letter ‘P’, and so on. Then, lowercase letters are used to refer to the subgroups. For example, for current assets ‘Ac’ could be used.
It should be said that, although it makes learning easier, it is actually little used given that there is always a small risk of ambiguities especially between subgroups.
5. With combined system
Basically, they are charts of accounts that use coding systems that combine two of the previous systems mentioned.
What is its structure?
There are three notable elements of the charts of accounts.
1. Category
The accounting item is what allows the company’s balance sheet to be divided into different types of accounts that is, what are assets, what are liabilities, what are costs…
2. Accounts
They are each of the lines that make up assets, liabilities, capital and others.
3. Subaccounts
The subaccounts are all those elements that make up a main account
