Company chart of accounts: what it is, how to structure it
The chart of accounts is one of the essential tools for monitoring a company’s evolution.
This is because the details of how money enters and leaves the cash register guide cost analyses, operating profits, the value of the assets built, among other details.
This information is also included in several reports sent to tax agencies (such as the Federal Revenue Service), which analyze whether the company is up to date with its tax obligations under its regime.
By creating a well-structured financial management system, it is possible to maintain detailed control of movements, facilitating decision-making to reduce costs or make new investments.
If your company does not yet have this monitoring, continue reading the article and understand what it is, its purpose and how to structure the chart of accounts with the main groups of necessary information.
Happy reading!
What is the company’s chart of accounts?
A company’s chart of accounts is the document that records all financial transactions, grouping data into categories and subcategories to detail all cash inflows and outflows that occurred in a given period. The tool makes it much easier to perform other accounting tasks .
Other activities carried out with the support of the chart of accounts are: the DRE (Income Statement), cash flow and the Balance Sheet.
Companies that need to present these results must have organized financial control to easily find and pass on all data to government tax control bodies.
The business budget is another definition that the plan supports, as it allows each expense in the different sectors to be carefully evaluated, facilitating decision-making regarding what will be spent and also the expenses that can be reduced/eliminated.
The finance team therefore reviews actual expenditures monthly, comparing them with the forecast. If necessary, adjustments can be made to targets to ensure compliance with the planned budget.
What is the purpose of the chart of accounts?
The purpose of the chart of accounts is to standardize the organization of the business’s financial and economic data to facilitate the visualization of assets and transactions made. The organization of the chart (we explain the structure in detail in the next topic) follows the progressive numerical order .
In other words, each category has a number and the existing subcategories are numbered following a logical sequence, showing that the content is interrelated. For example:
1 Category
1.1 Secondary category
1.1.1 Tertiary category
1.1.1.1 Quaternary category
1.1.1.1.1 Quinary category
This way, when registering the ‘Expenses’ category, it is possible to divide the ‘Operational Expenses’ from the ‘Administrative Expenses’, specifying what the expenses are in each one and their respective value, instead of just entering the total.
Imagine your finance team reports high expenses. The first question to ask would be: which category has the highest cost and then which of the costs in that group is the highest, right?
However, if only the sum of the category and subcategory is performed, without detailing each account, it becomes more difficult to make an accurate decision regarding which expenses to act on.
If your goal is to improve this aspect of your company’s financial management , the chart of accounts is the ideal tool to standardize and clearly detail, following an organized pattern, all the information necessary for accounting and business strategy.
What is the basic structure of the chart of accounts?
The basic structure of the chart of accounts is made up of the following categories: assets, liabilities, income and expenses. The document may have more topics and details depending on the reality of each company, but this initial structure brings together the essential data for financial control.
Therefore, it is important to understand what it means and what data is part of the four categories that form the basis of the plan. Check it out!
Assets
The ‘ Assets ‘ category is made up of the company’s tangible assets and rights, i.e. the items that make up the business’s positive equity.
- Current assets : refers to assets and rights that can be converted into cash in the short term within the current fiscal year, such as investments and inventory.
- Non-current assets : refers to the group of assets and rights converted into cash only in the long term, longer than the current year. Example: equipment, machinery, real estate (company headquarters), etc.
Non-current assets are subdivided into four other categories:
- Long-term realizable : tangible assets that can be converted into cash within a period of 12 to 24 months. This category includes fixed income investments and deposits with maturities greater than or after one year, scheduled payments expected to be received in more than 12 months, loans, and tax recovery.
- Fixed assets : these are the company’s physical assets used in the operation of the business, such as machinery, vehicle fleet, tools, real estate, among others.
- Investment : These are the financial assets in which the company invests to obtain future income for the business. Some examples are shares, foreign currency, real estate and the purchase of rights/patents.
- Intangible assets : these are intangible assets, that is, they are not physical, but they have economic value for the business. The main ones are technological patents, trademark registrations, copyrights or intellectual property rights, among others.
Liabilities
‘ Liabilities ‘ are all the accounts and financial obligations that the company has and must pay within the agreed terms with suppliers, partners and others. The category is divided into three subdivisions. They are:
- Current liabilities : these are the commitments that the company needs to settle during the fiscal year or during each operational flow throughout the year, such as payments for taxes, suppliers and services consumed (electricity, water, etc.).
- Non-current liabilities : these are financial obligations that have a maturity date greater than the 12-month cycle that will be included in the annual balance sheet. The main example is bank loans.
- Net worth : is the amount belonging to the company’s partners and shareholder members in a given period.
Revenues
‘ Revenues ‘ are related to all entries in the company’s cash register, that is, payments received relating to the sale of goods, products or services.
To specify each type of recipe, the information is divided into three categories:
- Sales revenue : is the amount received from the marketing of products and goods. The calculation is common in commerce and industry.
- Revenue from service provision : is the total amount received from the provision of services offered by the company.
- Financial income: is the amount obtained from the income from investments, applications and rentals of properties/equipment that the company makes.
Expenses
The ‘ Expenses ‘ section of a company’s chart of accounts includes all the operating costs required to keep the workflow going. This category has three subdivisions:
- Commercial expenses : these are the costs associated with the sales process, such as marketing, packaging, logistics and shipping services, manufacturing of gifts, etc.
- Administrative expenses : these are the costs of running the company, such as payroll, office supplies and equipment, rent for the headquarters, contracting services (electricity, internet, water, etc.), security solutions and others.
- Financial expenses : these are the costs associated with taking out loans (e.g. interest), using banking services, as well as benefits for employees, such as sales commissions, profit sharing and more.
How to make a chart of accounts?
To create an organized chart of accounts, it is essential to follow the category structure above, that is, the document must have, at the very least, details of assets, liabilities, income and expenses.
First, list all the information you have related to each category so that you don’t forget any details. This way, the data is pre-organized and can be adjusted in its corresponding group.
The naming of subgroups is another important step, as it will facilitate future searches in the document. This step varies depending on the volume of data that needs to be recorded and grouped.
An example for describing assets in the chart of accounts might have the following initial order:
1 Active
1.1 Current assets
1.1.1 Box
1.1.2 General box
1.1.3 Linked banks
1.1.3.1 Bank X
1.1.3.2 Bank Y
1.1.4 Accounts receivable
Another important detail related to nomenclature is to standardize the terms. If you use ‘Telephony’ to specify a subcategory within expenses, keep only that reference, not using variations, such as ‘Telephone service’, to avoid confusion.
Furthermore, since the chart of accounts serves as a starting point for creating other accounting documents, it is essential to know its structure in order to include the necessary damages in the plan.
This way, you speed up the work that will need to be done in the future, centralizing the data in a single standardized and organized document. This care makes it easier to search for information and prevents errors from being reproduced in important reports.
The structure of the chart of accounts is relatively simple, but gathering data and organizing everything can be more complex. So, call on your trusted accountant to guide the work of your internal team.
This way, all information derived from the chart of accounts will be safe and accurate, avoiding errors that can cause penalties, especially in the area of tax and duty settlements.
What types of chart of accounts are there?
Now that you know the basic structure of the chart of accounts, it is essential to also understand the types of documents that exist. See what they are and the information contained in each one:
Reference chart of accounts
The Revenue Reference Chart of Accounts (PCRR) , as the name suggests, is the Federal Revenue’s standard document for the transfer and specification of the accounts of companies in the country.
Following the model, companies make their accounting balances available, which in turn are part of the Fiscal Accounting Records ( ECF ).
Accounting chart of accounts
The accounting chart of accounts is an evolution of the previous one, including additional financial and equity information of the company.
The rules and creation structure follow accounting standards in place that guide the preparation of other reports, such as Income Statements and Cash Flow.
The PCRR standard may or may not be followed for preparing the accounting chart of accounts.
Management chart of accounts
The management chart of accounts does not follow a standard structure and can be customized according to the company’s needs and the level of detail that needs to be recorded.
Despite this, it is possible to use rules from previous plans to maintain familiar and easy-to-understand terms, both internally and externally (accountant and tax authorities)