The Chart of Accounts (CoA) is a structured list of a company’s financial accounts, used to categorize transactions and facilitate recording, reporting, and analysis. You can think of your CoA as an index for your startup’s accounting system. A well-structured CoA helps maintain consistent bookkeeping, streamline financial reporting, and provide valuable insights that guide strategic business decisions. For venture-funded startups, an accurate and up-to-date CoA is crucial for ensuring transparency, enhancing investor confidence, and facilitating effective financial management.
You can think of your CoA as an index for your startup’s accounting system.
The Chart of Accounts Typically Includes Five Types of Accounts:
- Assets: These are resources owned by the company that hold future economic benefits. Assets often include cash, accounts receivable, inventory, and fixed assets such as buildings and equipment.
- Liabilities: This category represents what the company owes. Liabilities might include accounts payable, loans, mortgages, or any other debt that the company needs to pay over time.
- Equity: Equity represents the owner’s claim once all liabilities have been paid off. This can include common stock, retained earnings, and treasury stock.
- Revenue: This category records all income earned by the company from its core business operations. Revenue accounts may include sales, service revenue, or interest revenue.
- Expenses: These accounts track all costs incurred to generate revenue. Common expenses include cost of goods sold, operating expenses like salaries, rent, utilities, and depreciation.
The numbering system in a Chart of Accounts (CoA) helps to structure and streamline your financial records, making it easier to locate specific accounts and understand their function in your business. Typically, account numbers are structured on a basis of the five main account types mentioned above – Assets, Liabilities, Equity, Revenue, and Expenses.
Here’s the general approach to the numbering system:
- Assets: Accounts in this category typically start with the number 1. For example, ‘1000’ might represent your primary Cash account, ‘1100’ could be Accounts Receivable, and so on.
- Liabilities: Liabilities often begin with the number 2. So, you might have ‘2000’ for Accounts Payable, ‘2100’ for Credit Card, etc.
- Equity: Equity accounts usually start with the number 3. So, ‘3000’ could represent Owner’s Equity, ‘3100’ for Retained Earnings, and so on.
- Revenue: Revenue accounts generally start with the number 4. For instance, ‘4000’ could be used for Sales Revenue, ‘4100’ for Service Revenue, etc.
- Expenses: These accounts typically start with the numbers 5, 6, 7, or 8. For example, ‘5000’ could denote Salaries Expense, ‘5100’ for Rent Expense, etc.
This numbering system can extend as needed to accommodate sub-accounts. For example, under the ‘5000’ Salaries Expense account, you could have ‘5110’ for Management Salaries, ‘5120’ for Staff Salaries, and so on. This provides a clear structure for your accounts and makes it easy to add new accounts as your business grows. Remember, the specific account numbers you use can vary depending on your business’s specific needs and the accounting software you use.
Sample CoAs for Startups
For an easy starting point or reference, download the example CoA that most closely matches your startup’s needs.
- SaaS Chart of Accounts Example
- Consumer Chart of Accounts Example
- Biotech Chart of Accounts Example
- Insurance Chart of Accounts Example
Class and Location Tracking
Class and location tracking is a tagging feature found in most accounting software that allows you to categorize revenue and expense transactions by a certain criteria, such as location/region, department, or business unit. This enables you to separate your business segments without the need for extra line items in your CoA. By applying these tags, you can generate a profit and loss statement that specifically displays transactions related to this particular line of business, streamlining the reporting process. This eliminates the manual effort required to extract data for each segment, providing a clear and concise view of profitability for each business segment.
10 Best Practices for Setting Up and Managing Your CoA:
- Simplicity: Start with a simple and intuitive structure that matches your business operations. Avoid complication by unnecessary granularity. Remember, you can always add more accounts as your business evolves.
- Consistency: Apply consistent naming and numbering protocols across your accounts. This consistency will make it easier to track and manage your financial transactions.
- Relevance: Make sure your CoA is relevant and aligns with your business model. Consider your specific industry requirements, business goals, and operations while setting up your CoA.
- Scalability: Design your CoA to grow with your business. Anticipate future expansion or changes in your business and incorporate flexibility to modify or extend your CoA accordingly.
- Standards: Comply with the Generally Accepted Accounting Principles (GAAP) or any other relevant accounting standards in your region. This ensures your accounting practices are legal and transparent.
- Regular Reviews: Regularly review and update your CoA. This will help to ensure its continued relevance and accuracy, reflecting your changing business environment.
- Sub-Accounts: Use sub-accounts to provide depth and details without cluttering your main CoA. For instance, you may have an “Office Expenses” account with sub-accounts like “Stationery”, “Utilities”, “Maintenance”, etc.
- Training: Ensure everyone who will be using the CoA understands it well and uses it correctly. Proper training and clarity can prevent errors and inconsistencies.
- Automation: Leverage accounting software and AI tools to automate your accounting process. This can save a significant amount of time and reduce manual errors.
- Professional Consultation: Seek professional help when needed. An experienced startup accountant can offer valuable insights and help optimize your CoA.