Chart of accounts: what is it and how to apply it in the company?
As a coordinator, manager or director of a company, it is essential to know what a chart of accounts is and, above all, how to apply it appropriately. After all, this is a highly relevant element for business accounting.
With a complete and well-structured account plan, it is possible to carry out various analyses, work on changes and make optimizations. Furthermore, there is the chance to make better and more informed financial decisions.
Want to know more about the subject? In this post, you will understand what a chart of accounts is and learn how to put it into practice correctly!
What is a chart of accounts and what is it for?
A chart of accounts is an organized, standardized structure used to record financial transactions in a company. It serves as a guide that determines how monetary information is classified and ordered in the organization’s accounting system.
This measure is crucial for financial control , preparing reports and financial statements, as well as meeting tax and regulatory obligations. It is worth knowing that there are two main types of charts of accounts: accounting and managerial.
The first is aimed at complying with legal and accounting requirements. It follows a standardized structure that includes categories such as assets, liabilities, expenses and income, according to the country’s regulations.
Its main function is to record transactions for tax and accounting purposes, generating reports that comply with government regulations.
The management account plan is developed internally by the company with a focus on financial management and decision making. It is more flexible and can be adapted to the company’s needs, including personalized categories to analyze departments, projects or products.
The management chart of accounts, unlike the accounting one, provides more detailed and specific information. Thus, it helps senior management to better understand the financial health of the business and make strategic decisions based on relevant information.
Both plans have their importance. Accounting is essential for legal and tax purposes. Management offers flexibility and data for the company’s internal management. In practice, many organizations maintain both types to meet all of their accounting and financial needs.
How does this plan work?
After understanding what a chart of accounts is, it is easy to see that it works as a hierarchical structure that classifies operations according to their type. Therefore, it makes it easier to monitor and control finances.
Accounts are grouped into categories such as assets, liabilities, expenses and income, and each of them has a unique code or number for identification. When a transaction occurs, it is recorded in an account according to its nature.
This information, in turn, is used to prepare financial statements, performance reports and comply with tax obligations. To use this plan effectively, the company must correctly identify all of its financial transactions.
This way, it is possible to monitor the flow of money, analyze performance and make informed decisions. By using this tool appropriately, it is also possible to obtain clarity about the company’s financial state and identify areas that require attention or adjustments.
What are the advantages of the chart of accounts for a business?
Considering how the chart of accounts works, the next step is to know its advantages for a company. Firstly, it provides an organized and standardized structure for recording transactions.
This opens up opportunities to simplify accounting, minimize errors, maintain the accuracy of financial records, and comply with tax and regulatory obligations. Furthermore, the chart of accounts facilitates analysis and strategic decision-making.
By categorizing movements into groups, this instrument allows a clearer view of the company’s financial health. As a result, it helps coordinators and managers identify areas for improvement, set goals and evaluate performance over time.
The chart of accounts also contributes to different results, such as:
- operational efficiency;
- tax compliance;
- optimization of accounting reports, such as the DRE (statement of financial results);
- reduction of default;
- financial success of the business.
How to apply this plan in the company?
So far, you have seen the main aspects of the chart of accounts. But, after all, how to create it and put it into practice? For this purpose, there are some fundamental points that you should consider.
Look!
Set the accounts
First, start by identifying all relevant accounts for the business — which includes assets, liabilities, income and expenses. Adapt the plan to reflect the company’s financial structure.
Create the structure
Next, organize the accounts into logical categories and subcategories. For example, group assets into cash , receivables and inventory, liabilities into taxes, loans and other categories. This structure will facilitate financial recording and analysis.
Assign codes
After creating the structure of the accounting chart of accounts, it is important that you define unique codes for each type of account. This measure will help with organization, quick search for information and avoid errors. Everyone involved must be aligned regarding this standardization.
Suppose your plan is structured as “4. Expenses”, “4.1. Administrative expenses” and, within it, in “4.1.1. Electricity”. In this case, everyone must follow these codes and sublevels.
Record transactions
As the company carries out financial transactions, such as purchases or sales , it is essential that these operations are recorded in the appropriate accounts according to the established plan.
Invest in training
As the chart of accounts will be used by different professionals, it is essential that everyone undergoes training to use it correctly. Ideally, teams clearly understand how to record and categorize each financial transaction.
Generate reports
With the chart of accounts designed and structured, use it to generate regular reports, such as balance sheets and income statements. This practice will help with financial analysis and decision making.
Carry out periodic reviews
Finally, it is worth highlighting that this resource is not static. So as your company grows or changes, it’s essential to review and adjust it as needed.