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 file where numbers are put, the truth is that they are essential for any company that wishes to continue to maintain float.

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.

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What is a chart of accounts?

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 recording of economic transactions, systematizing all types of expenses and income that have been made. Typically, charts of accounts are arranged in the following order: assets, liabilities, equity, income, costs, and expenses.

The regulations of each country mean that companies have a variable degree of freedom when it comes to prepare this type of documents, adjusting them to your needs and the most convenient way to your reality business. The size of the catalog will always depend on how complex the business is.

What are its main advantages?

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 the inflow and outflow of money from the organization.

Also, thanks to having a record, either in paper or digital format, there is a document that shows how it is taking place. the flow of money in the company, both when it comes in and when it goes out, specifying how it is doing so and in what quantity. Thanks to this, in the case of making budgets for various purposes, it is possible to make a much more precise estimate of what is going to be needed or what is going to be spent.

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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, sufficient data will be obtained from 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 see the regulations in force and see if the company has something pending to solve.

A very important aspect when drawing up a chart of accounts is that you must accept changes 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 in an erroneous way.

During data collection, It is very important to take into account the following aspects of the company:

• Financial data by department.
• Projects.
• Regional data.
• Tax obligations.
• Major sources of profit.

To facilitate the handling of data by accountants and account bookkeepers, it is common to use the following coding in charts of accounts:

• 1-000X for assets.
• 2-000X for passives.
• 3-000X for capital.
• 4-000X for income.
• 5-000X for costs.
• 6-000X for expenses.

main features

As we have already seen, the charts of accounts must have a series of characteristics so that they can be really useful for the company and its workers. Next we will see more thoroughly what these characteristics are.

1. Flexibility

By flexible it is meant that charts of accounts they must be able to allow someone to add new accounts to them, according to the reality of the company.

Sometimes it happens that, when these types of documents are being prepared, they forget to add some expense or profit. That is why, since money is never left over in the business world, it must be recorded in the document, even if it is added later.

2. Precision

It is necessary that the different transactions of the organization are codified in an unambiguous way and with the minimum ambiguity possible. The symbols or codes used for costs, liabilities, assets, etc., should be the least similar to each other. The idea is to avoid any kind of confusion.

3. rational

charts of accounts They should make it easier to group accounts that have some kind of relationship, (eg, expenses on construction materials: wood, bricks, cement...)

4. Simplicity

A catalog of accounts should not be prepared as if it were the Calixtino Codex. 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 mean in a manual is not functional at all.

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.

1. with alphabetical system

To refer to assets, liabilities, capital, income, costs and expenses, letters are used. 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, numbers from 0 to 9 are used. For example, 0 is active, 1 is passive...

3. with number system

The charts of accounts they use A number system classifies all accounts in the organization 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 the letter 'A' can be used and for liabilities the letter 'P', and so on. Then, to refer to the subgroups, lowercase letters are used. For example, for current assets 'Ac' could be used.

It should be said that, although it facilitates its learning, it is not really used since 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 aforementioned systems.

What is its structure?

There are three notable elements of the charts of accounts.

1. heading

The accounting item is what allows dividing the balance sheet of the company 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.

Bibliographic references:

• Marden, S. J., (2010). Australian Master Bookkeepers Guide. 3rd ed. Sydney: CCH Australia Limited.
• Clarke, Edward A. (2012). Accounting: an introduction to principles and practice, 7th Edition. Cengage Learning Australia Pty Ltd. pp. 106–109.