Designing a Chart of Account (COA) Structure

Designing a new COA, in accordance with Generally Accepted Accounting Principles (GAAP), for a new company or changing an existing COA is easy to accomplish if you understand the basic fundamentals.

There are 3 fundamental rules that need to be followed when designing a new chart of accounts.

                                                                                Keep it Simple

                                                                            Allow for Flexibility

                                                        Develop a Logical Numbering Sequence

When designing the COA, you will need to look at it in 2 parts.  The 1^st part is the Balance Sheet and the 2^nd part is the Income Statement.  Depending on whether your company is on Cash or Accrual basis will assist in guiding the type of accounts that will be required. 

For the purpose of this blog, we have defined the following structure:

                                Account Category

                                                Summary Account Roll-up

                                                                Account

Account Category

The Balance Sheet includes account categories, such as; Cash, Accounts Receivable, Inventory, Current Assets, Fixed Assets, Long-Term Assets, Accounts Payable, Short-Term Liabilities, Long-Term Liabilities, and Equity. 

The Income Statement includes account categories, such as; Revenue, Cost of Goods Sold (COGS), Operating Expenses, Other Income, Other Expenses, Interest, Depreciation, Amortization and Taxes.

Summary Account Roll-up

Summary Account Roll-up totals up a group of like accounts, for example:

“Travel” would be the Summary Account Roll-up account.  The total of the following related accounts Air, Train, Taxi, Hotel, etc. would equal the Summary “Travel” Roll-up account.

Account

Account is the base element where the transaction is recorded.  Note that within the Equity account category: accounts such as; Retained Earnings and Net Income are accounting system generated.  

Keep it Simple

Once the account categories have been determined, define the accounts in each account category.  Once the accounts have been decided upon, group similar accounts together within each category to form a summary account roll-up (Some accounting systems allow for additional roll-ups). 

For example:

                  6XXX Operating Expenses (Account Category)

                                6000 Salaries & Wages (Summary Account Roll-up)

                                                6010 Executive Staff (Account)

                                                6020 Administrative Staff (Account)

                                                6030 Bonuses (Account)

                                6100 Payroll Taxes (Account)

                                6200 Benefits (Summary Account Roll-up)

                                                6210 Health Insurance (Account)

                                                6220 401K Match (Account)

                                                6230 Paid Time off (Account)

Grouping similar accounts will allow you to quantify each group for easier understanding of the company’s financial position. 

Note: In Quickbooks, do not leave the accounts in alphabetical order.

Allow for Flexibility

Each accounting system allows the user, including Quickbooks, to establish a unique COA structure.  Make sure that when defining the segments of the COA that you have thoroughly thought out the reporting output.  In addition, define each account number with enough room to add a new account if needed. 

Develop a Logical Numbering Sequence

A good standard numbering sequence that could be used is:

Balance Sheet (“X” wild card number)

                1XXX      Assets

                                1000 Cash

                                1200 Accounts Receivable

                                1300 Inventory

                                1400 Current Assets

                                1500 Fixed Assets

                                1900 Long-term Assets

                2XXX      Liabilities

                                2000 Accounts Payable

                                2400 Short-term Liabilities

                                2900 Long-term Liabilities

                3XXX      Equity

                                3000 Equity

                                3999 Retained Earnings (Accounting System Generated – Established at Setup)

Income Statement (“X” wild card number)

                4XXX      Revenue

                5XXX      COGS

                6XXX      Operating Expenses

                                6000       Salaries & Wages

                                        6010       Executive Staff

                                        6020       Administrative Staff

                                        6030       Bonuses

                                6100       Payroll Taxes

                                6200       Benefits

                                        6210       Health Insurance

                                        6220       401K Match

                                        6230       Paid Time off

                70XX      Other Income

                75XX      Other Expenses

                8000      Interest

                8100      Depreciation

                8200      Amortization

                9XXX      Taxes