The Chart of Accounts in teaching

This article explains what the Chart of Accounts is and how it can be used in teaching and assessments. It’s a topic that’s addressed in Accounting Information Systems courses, but has relevance to more general accounting education too. It’s an important part of the plumbing system that connects each piece of financial information to the accounting framework.

What is the Chart of Accounts?

The Chart of Accounts is a report listing all the nominal or ledger accounts within an organisation’s accounting system.

This list is more important than it might sound. If you can’t get the information you need from the accounting system, it’s probably because the Chart of Accounts hasn’t been set up properly.

In any accounting system, we give every ledger or nominal account a unique code. The coding system is structured such that each account is associated with its financial statement element. In most parts of the world organisations are free to create their own Chart of Accounts in any way that suits them, although France makes a notable exception. ^[1]

Here’s an example of a fairly simple coding structure.

This coding scheme identifies all liability accounts within the range 300–499. We might apply additional rules so that current liabilities are in the range 300–399 and non-current liabilities in the range 400–499. Depending on the size and complexity of the business, we could create a compound structure to identify operating segments or geographical areas.

The importance of good design in building a Chart of Accounts

Structured codes enable us to identify accounts more easily and therefore to having more accurate accounting records—you don’t want to confuse the tax expense account with the tax liability account. A structure also makes it easier to group together similar accounts to generate reports.

A good Chart of Accounts is also designed to accommodate growing numbers of accounts to avoid the whole system becoming unwieldy.

I think it’s important that students understand the role of the Chart of Accounts…If you mess that up you’re going to end up with messy financial information.

Nikki Schonfeldt CA FHEA

Imagine that you’ve been asked to create a Chart of Accounts for a business selling three categories of product: rocks, paper and scissors. The client wants to monitor gross profits generated by each category. So, you create three sales revenue accounts and three cost of sales accounts.

The client explains that each category has six product types. The number of requried nominal accounts is now 36.

There are also two types of revenue — wholesale and retail. The number of nominal ledger accounts required to 72.

You must additionally create three accounts for each operating expense account if operating profit by category is required. You can see that things can quickly spiral.

Tagging transactions is also an option. ^[2] This is a way of analysing transactions outside the nominal ledger structure. Once the tagging rules are in place, every transaction must be tagged, or you’ll end up with “unanalysed” as your biggest reported category.

There’s a trade-off to be made between ease-of-use and designing a Chart of Accounts for every conceivable use. The more complex the system, the easier it is to mis-code transactions. It’s also more time-consuming — and therefore expensive — to record transactions.

Consequently, many businesses use a separate inventory management system for detailed product performance metrics, and use the accounting system for more general financial measures.

Using the Chart of Accounts for assessments

Here are three examples of how you can use this in your teaching.

Nikki Schonfeldt, at the University of Western Australia, uses the Chart of Accounts to demonstrate the importance of data integrity. She requires students to explore an accounting platform through self-directed learning. They create new accounts, delete unwanted accounts, and rename others. Students have responded favourably to this approach, one of whom said “it was the first time I had ever seen a ‘real world’ chart of accounts for a business.”

At Queensland University of Technology, Liz Marsland has adopted a similar approach but also uses the Chart of Accounts as part of an online assessment to test understanding of journals. Students familiarise themselves with a Chart of Accounts in advance. During the assessment they answer “debit / credit” style questions by providing the relevant account code from the Chart of Accounts. She reports that this has been particularly welcomed by students without English as their primary language.

Impressively, Rashid Zaman, Edith Cowan University, has created an integrated simulation exercise as part of a course. He requires students to transfer manual accounting records to a cloud-based system, such as Xero. Students set up a company, create its Chart of Accounts, post the opening balances, set up inventory records and then record a month of sales and purchase transactions. Using these records they then perform a bank reconciliation, process year end adjustments, and produce a set of financial statements.

Notes, references and further reading

Note 1: In France, the Chart of Accounts is determined by the Authority of Accounting Rules (Autorité des normes comptables or ANC), and is integrateed within its generally accepted accounting principles, the Plan Comptable Général (PCG). Available at: https://www.plancomptable.com/titre-IV/liste_des_comptes_sb.htm. Accessed 13 October 2022.

Note 2: eXtensible Business Reporting Language (XBRL) is a form of open-source tagging as it encodes amounts and statements within published financial reports in a way that can be understood by a computer. What XBRL International calls a taxonomy is really just a chart of accounts by another name. Available at: https://www.xbrl.org/. Accessed 13 October 2022.

This is part of the Teaching tips series of articles

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