In the business world it is very important to have a meticulous record of all the money coming in and out of the organization, and how much is planned to be spent in the future.
A catalogue of accounts is a type of document that serves this purpose and, although it may seem like a simple paper or digital file where numbers are placed, the truth is that they are essential for any company that wishes to remain afloat.
Let’s take a closer look at what they are, how they are made, what types of codes they use and what their structure is.
What is a catalog of accounts?
A chart of accounts is a document that is used to record the operations of an organization . In other words, it serves to establish what the structure of the company is when it comes to accounting for business activities.
These types of documents are very important in the field of accounting , given that they greatly facilitate the recording of economic transactions, systematizing all types of expenditure and income that have been made. Normally, the catalogues of accounts are organised in the following order: assets, liabilities, capital, income, costs and expenses.
The regulations of each country mean that companies have a variable degree of freedom when it comes to drawing up this type of document, adjusting it to their needs and the most suitable form for their business reality. The size of the catalogue will always depend on how complex the business is.
What are its main advantages?
Because these types of documents are usually very flexible, the company’s workers can keep a record of every operation of the company in a rigorous way, taking into account any changes in the organization’s incoming and outgoing money .
Also, thanks to having a record, whether in paper or digital format, you have a document that shows how the money is flowing in the company, both when it enters and when it leaves, specifying in what form it is doing so and in what amount. Thanks to this, in case of making budgets for various purposes, it is possible to make a much more precise estimate of what is going to be needed or spent.
How is it made?
When designing a catalog of accounts it is very important to find out what transactions are taking place in the business. This way you will have enough data from the company’s management.
In addition, because each country has different regulations regarding the organization of the company and associated taxes (such as VAT or personal income tax), it is important to look at the regulations in force and see if the company has anything pending.
A very important aspect when drawing up a catalogue of accounts is that must accept changes in the future , as it may always be the case that a service has been charged or paid for that has not been provided in the end or that some data has been entered incorrectly.
During data collection, it is very important to take into account the following aspects of the company :
- Financial data by department.
- Regional data.
- Tax obligations.
- More important sources of profit.
To make it easier for accountants and bookkeepers to handle the data, the following coding is commonly used in catalogues of accounts:
- 1-000X for assets.
- 2-000X for liabilities.
- 3-000X for capital.
- 4-000X for income.
- 5-000X for costs.
- 6-000X for expenses.
As we have already seen, catalogues of accounts must have a number of characteristics in order to be really useful for the company and its workers. We will now look more closely at what these characteristics are.
By flexible we mean that the catalogues of accounts must be able to allow someone to add new accounts to them, in accordance with the reality of the company .
It sometimes happens that, when preparing this type of document, one forgets to add some expense or gain. That is why, since money is never in short supply in the business world, it must be recorded in the document, even if it is added later.
It is necessary that the different transactions of the organisation are coded in an unambiguous way and with the minimum ambiguity . The symbols or codes used for costs, liabilities, assets, etc., should be as least similar to each other. The idea is to avoid any kind of confusion.
The catalogues of accounts should make it easier to group together accounts that have some kind of relationship , (e.g., expenditure on building materials: wood, bricks, cement…)
A catalogue of accounts should not be drawn up as if it were the Codex Calixtinus. The symbols used must be easy to memorize and manage for the members of the company .
It is not at all functional for an account catalogue to be drawn up in such a way that the user has to consult, over and over again, what the codes or letters mean in a manual.
Main types of catalogues of accounts
There are different types of chart of accounts depending on the type of coding system you use. The top five are shown below.
1. With alphabetical system
To refer to assets, liabilities, capital, income, costs and expenses, letters are used. For example, ‘A’ is for assets, ‘B’ is for liabilities, ‘C’ is for capital…
2. With decimal system
To refer to the different fiscal terms mentioned above, numbers from 0 to 9 are used. For example, 0 is active, 1 is passive
3. With numerical system
Account catalogs that use a number system classify all accounts in the organization into groups and subgroups , assigning a number to each type of transaction. For example, 1 – assets, 11 – current assets, 11-10 cash
4. With mnemonic system
The accounts are classified so that you can easily memorize how they are referred to in the catalogue. For example, for assets you can use the letter ‘A’ and for liabilities the letter ‘P’, and so on. Then, to refer to the subgroups you use lowercase letters. For example, for current assets you could use ‘Ac’.
It should be said that, although it facilitates their learning, it is little used in reality since there is always a small risk of ambiguity , especially among subgroups.
5. With combined system
Basically, they are catalogs of accounts that use coding systems that combine two of the above systems.
What is its structure?
There are three main elements in the catalogues of accounts.
The accounting item is that which allows to divide the balance sheet of the company in different types of accounts , that is, what are assets, what are liabilities, what are costs…
These are each of the lines that make up the assets, liabilities, capital and others.
Las subcuentas son todos aquellos elementos que integran una cuenta principal .
- Marsden, S. J., (2010). Guía del Maestro Contador de Australia. 3ª ed. Sydney: CCH Australia Limited.
- Clarke, Edward A (2012). Contabilidad: una introducción a los principios y la práctica, 7ª edición. Cengage Learning Australia Pty Ltd., págs. 106 a 109.