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A chart of accounts (COA) is a created list of the accounts used by a business entity to define each class of items for which money or the equivalent is spent or received. It is used to organize the finances of the entity and to segregate expenditures, revenue, assets and liabilities in order to give interested parties a better understanding of the financial health of the entity.

The list can be numerical, alphabetic, or alpha-numeric. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique to allow its ledger

Ledger

A ledger is the principal book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which...

 to be located. The list is typically arranged in the order of the customary appearance of accounts in the financial statements, profit and loss accounts followed by balance sheet accounts.

Nomenclature, classification and codification

Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified. (Software for some small businesses may not require account numbers.) Account numbers are often five or more digits in length with each digit representing a division of the company, the department, the type of account, etc.

As you will see, the first digit might signify if the account is an asset, liability, etc. For example, if the first digit is a "1" it is an asset. If the first digit is a "5" it is an operating expense.

A gap between account numbers allows for adding accounts in the future. The following is a partial listing of a sample chart of accounts.

Simple Chart of Accounts

Group headings -
Sales,
Cost of Goods Sold

Cost of goods sold

Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

,
Direct Expenses,
Administration Expenses,
Selling Expenses,
Distribution Expenses,
Establishment Expenses,
Financial Expenses

Within each of these headings will be the individual nominal ledger accounts that make up the chart of accounts.
Establishment expenses may consist of rent, rates, repairs

Balance Sheet Accounts
---- Asset Accounts ----
Cash,
Bank Accounts,
Accounts Receivable (Debtors),
Prepaid Expenses,
Inventory (Stock on Hand),
Land,
Buildings,
Vehicles & Equipment,
Investments & Stocks,
Accumulated Depreciation and
Other Assets
---- Liability Accounts ----
Accounts Payable (Creditors),
Credit Cards,
Tax Payable,
Employment Expenses Payable,
Bank Loans,
---- Stockholders' Equity Accounts ----
Common Stock (Share Capital),
Retained Earnings (Revenue Reserves),
Drawings

Profit & Loss accounts
---- Revenue Accounts ----
Sales Revenue,
Sales Returns & Allowances,
Sales Discounts,
Interest Income,
----Cost of Goods Sold Accounts----
Purchases and sales Expense
All sales Expense
Purchase Returns & Allowances
---- Expense Accounts ----
Advertising Expense,
Bank Fees,
Client Expense,
Depreciation Expense,
Payroll Expense,
Payroll Tax Expense,
Rent Expense,
Income Tax Expense,
Office Expense,
Utilities Expense

Trial Balance

The trial balance

Trial balance

A trial balance is a list of all the nominal ledger accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value...

 is a list of the active general ledger accounts with debit and credit balances. A balanced trial balance does not guarantee that there are no errors in the nominal ledger entries.

Types of accounts

1. Asset
   Asset
   In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
   
    accounts: represent the different types of economic resources owned by a business, common examples of Asset accounts are cash, cash in bank, building, inventory, prepaid rent, goodwill, accounts receivable
2. Liability
   Liability (financial accounting)
   In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.A liability is defined by the...
   
    accounts: represent the different types of economic obligations by a business, such as accounts payable, bank loan, bonds payable, accrued interest.
3. Equity
   Ownership equity
   In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
   
    accounts: represent the residual equity of a business (after deducting from Assets all the liabilities) including Retained Earnings and Appropriations.
4. Revenue
   Revenue
   In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
   
    accounts or income
   Income
   Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
   
   : represent the company's gross earnings and common examples include Sales, Service revenue and Interest Income.
5. Expense
   Expense
   In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
   
    accounts: represent the company's expenditures to enable itself to operate. Common examples are electricity and water, rentals, depreciation, doubtful accounts, interest, insurance.
6. Contra-accounts: Some balance sheet items have corresponding contra accounts, with negative balances, that offset them. Examples are accumulated depreciation against equipment, and allowance for bad debts against long-term notes receivable.