Which Of The Following Statements Is The Best Definition Of The Chart Of Accounts?

The correct option of this multiple choice question is (D), a Chart of Accounts (CoA) shows a list of all ledger’s accounts (whether assets, liabilities, equity, revenues or expenses) with a unique identification number for easy locating the accounts and for references in an accounting system. For example, we assign 1000 as identification number to cash account for easily locating it in the list of all ledger accounts balances. Basically, a CoA shows a list of two types accounts i.e., Balance Sheet Accounts and Income Statement Accounts.

The CoA does not provide the data about the debit and credit of accounts and their balance included in Financial Statements but it provides a list of all accounts shown on financial statements for viewing about account lists at a glance and to know about the financial health of the business. It helps us in analyzing, reporting the accounting data and the preparation of financial statements. By assigning unique identification number to each account, errors and mistakes are easily corrected as the accountant easily track the records with assigned identification number and the category to which an account belongs to.

Here is an example of numbering system used in a Chart of Accounts:

Assets - Account ID: 1000-1999

Liabilities - A/C ID: 2000-2199

Equity - A/C ID: 3000-3999

Revenues - A/C ID: 4000-4999

Expenses - A/C ID: 5000-5999

The option (A) is incorrect choice here as it is a General Ledger which shows a collection of all accounts’ balances.

The option (B) is also wrong choice here as a Journal is used to record all the business transactions occurred in a chronological order (date-wise). It is a book of original entry as all the transactions are firstly recorded in journal with help of source documents.

The option (C) is also not correct choice here as it is a Trial Balance which shows the list of all accounts and the equality of debit and credit accounts’ balances at any given time.