The chart of accounts is the core of the accounting system, and it is the basis on which everything in the fields of finance and accounting is based. This hierarchical structure of accounts organizes and determines how to record, classify, and summarize financial operations. It is also the key to understanding the financial status of any facility. It is worth noting that understanding how this chart works and its importance helps accountants and financial managers make more accurate and reliable decisions. It is not just a set of numbers and data, but rather the means by which organizations can manage their business effectively, track financial flows, and also make strategic decisions. So in this article, we will explore in detail what these charts are, how they organize financial statements, how they can be used to improve a company’s financial performance, and how to prepare them. So stay tuned with us until the end.
What is the chart of accounts?
It is an organizational map that helps us classify and tabulate all financial operations that take place in the facility. The account is the tool through which we record all financial transactions under a specific item, such as the sales account, which summarizes all financial transactions related to sales. In order for us to be able to follow up and manage these financial transactions in an organized manner, we need a tree of accounts that numbers and classifies these accounts. The numbering system usually begins with assets, followed by liabilities, then owner’s equity, then revenues and expenses.
The chart of accounts is a map through which we can refer to any account and determine its location among other accounts. Therefore, it is one of the most important basic elements of the accounting system.
What is the benefit of the chart of accounts?
There is great importance in using the chart of accounts in accounting, as it facilitates the process of organizing and documenting the organization’s financial operations effectively. The importance of the chart of accounts can be summarized as follows:
Financial Transactions Tab: This chart helps categorize each financial transaction into its appropriate accounts. This facilitates the monitoring and analysis of financial flows.
Ease of preparing financial statements: Based on the classification specified in the tree, data can easily be extracted to prepare financial statements such as the budget.
Control and follow-up: It helps in following up on financial movements and easily discovering any errors or violations.
Financial analysis: the possibility of financial analysis and comparisons between different periods, and understanding the organization’s performance.
Organization and management: It helps in organizing and managing accounts according to an integrated accounting system.
How to make a complete chart of accounts
The chart of accounts is the organizational structure of the financial accounts in the company, as it aims to organize and classify these accounts in a logical and coordinated manner. Remember that there are a set of basic points that must be taken into account when designing this tree:
Identify key accounts.
The main accounts must be identified, such as assets, liabilities, equity, revenues, and expenses. It is worth noting that these will be the highest levels in the tree of accounts.
Classification of subaccounts
Secondly, the sub-levels for each main level come as follows:
- Assets are divided into current assets and non-current assets.
- Liabilities are divided into current and non-current.
- Equity includes capital, reserves, and retained earnings.
- Revenues are divided into sales revenues and miscellaneous revenues.
- Expenses are divided into administrative, selling, and operational.
It is worth noting that these sub-levels provide greater detail for each financial aspect of the organization.
Division of sub-levels
Third, the sub-levels are further divided into lower levels, as follows:
- Current assets include cash, customers, inventory, and other receivables.
- Other non-current assets include fixed assets, intangible assets, and investments.
Thus, the lower levels deal with the finer details of each part of the chart of accounts.
Add analytical levels.
Other analytical levels can be added to the sub-items, which increases the accuracy and focus of the chart of accounts. Clients can be divided into retail and wholesale clients, or local and international, and investments into investments in sister and affiliated companies, which are available for sale.
Account numbering
A number is given to each main and sub-account to reflect its position in the structure, and there is usually a specific numerical sequence that most companies follow, which we will explain in more detail in the next paragraph.
Flexibility and scalability
The chart of accounts must be able to be developed in the future to suit the growth and development of the company and the complexity of its operations.
Coordination with accounting standards
When designing this chart, the applicable accounting requirements and standards must be taken into account to ensure compatibility and harmony. The best solution for you is to use an accounting program, such as Qoyod.
Examples of a chart of accounts
In order to understand this chart more closely, suppose that there is a retail company. We find that its main accounts include: assets, liabilities, and capital, and under each of these main accounts there are detailed sub-accounts, such as: fixed assets, current assets, and intangible assets; In turn, these subaccounts are divided into more challenging secondary accounts, such as cash in the bank, receivables, and inventory.
It is worth noting that this hierarchical classification allows accountants to track and analyze financial operations with extreme accuracy. For example, changes in the cash balance in the bank can be monitored, as can how these changes relate to other operations, such as sales and purchases.
| Main account | Secondary account | Subaccount |
| Assets | Buildings | Fixed assets |
| Cash in the bank | Current assets | |
| hardware | ||
| Inventory | ||
| Commercial rights | Intangible assets | |
| Debtors | ||
| liabilities | Salaries owed | |
| Bank loans | Long-term liabilities | |
| Suppliers | Short-term liabilities | |
| capital | retained earnings | |
| Original capital | capital |
Coding items in the chart of accounts
This chart consists of several levels, where each main account is divided into sub-accounts, which in turn may be divided into finer accounts.
Identify key accounts.
The process of building a chart of accounts begins by identifying the main accounts, which are usually assets, liabilities, equity, revenues, and expenses, so that each main account is given a unique number. For example:
- Assets (1).
- liabilities (2).
- equity (3).
- Revenue (4).
- Expenses (5).
Divide the main account into a sub-account.
After that, each main account is divided into sub-accounts, which receive distinct numbers starting with the main account number. For example, under Assets (1), there may be current assets (11) and non-current assets (12). This method divides subaccounts into more detailed levels.
The different categories of the chart of accounts
The general chart of accounts brings together all the accounts that the company is likely to use during its cycle, and so we find all the accounts there, without distinction of sector of activity, and they are divided into 8 categories:
- The first category is capital accounts.
- Second: fixed asset accounts.
- The third category is inventories and work in progress.
- Fourth: third-party accounts.
- Fifth category: financial accounts.
- Sixth: shipping accounts.
- Seventh category: product accounts.
- Eighth: private accounts.
It is worth noting that their uses are intended for different purposes, and in fact, categories 1 to 5 are used to produce the accounting balance sheet in the tree of accounts, categories 6 and 7 are used in the income statement, and category 8 is used only in certain specific cases.
These categories are then divided and unified using a number-coding system, as the subcategories take the chapter number to which a second number is added. For example, in financial accounts (5), we find banks and financial institutions (51). Finally, this tree structure continues, ending with the accounts registered under each subcategory, which follow the same coding, and thus the bank account (512) belongs to subcategory 51.
An illustrative model for coding the chart of accounts
| Assets | #1 | |||
| Current assets | #11 | |||
| Cash | #111 | |||
| Customers | #112 | |||
| Inventory | #123 | |||
| Non-current assets | #12 | |||
| Fixed assets | #121 | |||
| Buildings | #1211 | |||
| Machines | #1212 | |||
| cars | #1213 | |||
| Intangible assets | #122 | |||
| Patents | #1221 | |||
| the fame | #1222 | |||
| Investments | #123 | |||
| Investments in sister companies | #1231 | |||
| Investments in Affiliates | #1232 | |||
| Investments are available for sale. | #1233 | |||
| liabilities | #2 | |||
| Current liabilities | #21 | |||
| Suppliers | #211 | |||
| Short-term loans | #212 | |||
| Non-current liabilities | #22 | |||
| Long-term loans | #221 | |||
| Long-term allocations | #222 | |||
| Deferred tax liabilities | #223 | |||
| equity | #3 | |||
| capital | #31 | |||
| the reserve | #32 | |||
| retained earnings | #33 | |||
| Revenues | #4 | |||
| Sales revenue | #41 | |||
| Miscellaneous income | #42 | |||
| Expenses | #5 | |||
| Administrative expenses | #51 | |||
| Selling expenses | #52 | |||
| Operating expenses | #53 | |||
Common mistakes when preparing a complete chart of accounts
Preparing the chart of accounts is a vital process in managing the financial records of any facility, but there are some common mistakes that accountants often make during this process that everyone should pay attention to, which are as follows:
Failure to update the chart regularly
Failure to update the chart regularly is crucial. Business and financial processes are constantly changing, so it is necessary to review and modify the chart periodically to ensure that it accurately reflects the current financial position of the company. If accountants neglect this task, inaccurate or misleading financial statements may result.
Accounts are not classified correctly.
Not classifying accounts correctly is another common problem. It is important for accountants to develop an effective system for classifying accounts into the appropriate categories, such as assets, liabilities, revenues, expenses, etc. If they are not classified correctly, this may lead to difficulty in analyzing financial statements and planning effectively.
How to add a new account to the account tree via the Qoyod program
After you have decided to choose an accounting program, such as Qoyod, to do the arduous tasks for you, you may be confused about adding a new account to the program’s tree of accounts, so follow the following steps:
- After logging into the account, you will find in the side menu the “Accounting” box. After clicking on it, several options will appear, including the “Chart of Accounts.
- After clicking on “Chart of Accounts,” a detailed page will open with all the tasks related to the chart of accounts. At the top of the page, you will find the option to “Add an Account”:
- After entering the page, you will have to fill out all the fields required to create a new account, which are: main account, account type, English name, Arabic name, symbol, description, and the ability to pay and collect with this account.
A simplified explanation of how to change the fields that you must fill out when creating a new account in the account tree in Qoyod:
- The program will ask you to select the main account (direct parent) to which the new account will belong.
- For example, if you want to create an account, you can choose the Cash in Vault account as the direct parent account.
- Next, you will need to select the new account type, such as “Bank Account,” and then enter the account name in both Arabic and English.
- Adding a description of the new account is optional, but it is a good idea to add it to clarify the nature of the account and its purpose.
- Then you can specify whether you want payment and collection to be made through this account.
- Finally, click “Save” to complete the creation of the new account, or click “Reset,” thus emptying all fields to fill in again.
With these simple steps, you can easily create a new chart account using Qoyod accounting software.
Conclusion
The chart of accounts is a powerful and articulated tool in the world of accounting, and it guides accountants in recording, tabulating, and analyzing financial transactions. Thanks to this chart, accountants can accurately track all the details of an organization’s financial movements and extract from them a comprehensive and reliable picture of its financial situation, but more importantly, it gives accountants and administrators the ability to make informed decisions about the future. By analyzing the items in this chart and their relationships to each other, it is possible to anticipate the financial trends of the facility and suggest appropriate strategies to enhance its situation. Therefore, mastering the preparation of this chart was the key to success for accountants in our time, as through it they could master the language of numbers and translate them into decisive decisions that pushed enterprises to excellence and leadership.
If you encounter a problem in preparing the chart of accounts for your facility, it is better for you to use an integrated cloud accounting program to do this task for you, but despite the existence of dozens of these programs, the Qoyod program always remains at the forefront. It is worth noting that it also offers all its customers electronic invoice systems, as well as point-of-sale systems, warehouses, customers, etc., at unparalleled prices and quality.
After you learned what the chart of accounts is, try Qoyod now for free for 14 days to save time and effort.
Join our inspiring community! Subscribe to our LinkedIn page and Twitter to be the first to know about the latest articles and updates. An opportunity for learning and development in the world of accounting and finance. Don’t miss out, join us today!
