How does one decides or knows which COA to use and what is the standard definition of the activities?

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Hi Community, I'm trying to understand the COA of my company, but as the Accountants are new to the industry, and the COA was recorded by the previous Accountant. I wonder is there anyway we can understand the Chart of Accounts meaning and what the activities stand for ?

Is there any books or websites that specifically explain about this? For example, sometimes I see COS - Direct Materials vs COS - Direct Materials Consumables... how does one decide which to put into?

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Thank you for your kind help!
 

DrStrangeLove

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The chart of accounts a company uses is a choice made by the accountants in that firm, particularly the CFO and controller. The specific accounts reflect the industry, the nature of the business (merchandising vs manufacturing vs service, for example), and the applicable accounting standards. Different firms may define the same account slightly differently, but for the most part firms in the same industry will have similar definitions, since they'll be subject to the same accounting standards. Knowing those definitions is part of the industry knowledge accountants need in order to be useful to a particular firm.

To your question about COS - Direct Materials vs the COS - Direct Materials Variance (COGS) accounts shown: Those are used by manufacturing companies in accounting for the consumption of materials used in their operations. The Direct Materials account is used to charge the cost of raw materials to Work-In-Process account that accumulates the cost of inventory. The Direct Materials Variance (COGS) account is used to apply the difference between the standard direct materials costs budgeted (expected) and the actual direct materials cost to an appropriate inventory cost account. Based on the account title, it looks like this company charges excess cost of direct materials to Cost of Goods Sold (COGS). I imagine your company uses its ledger for both budgeting and actual reporting, so having the two accounts shown separately would let them gain insight in their actual vs. expected earnings for a given period.

A good textbook on cost accounting or managerial accounting should be able to give you the details of those accounts and how they're generally used.
 

Fidget

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Hi Community, I'm trying to understand the COA of my company, but as the Accountants are new to the industry, and the COA was recorded by the previous Accountant. I wonder is there anyway we can understand the Chart of Accounts meaning and what the activities stand for ?

Is there any books or websites that specifically explain about this? For example, sometimes I see COS - Direct Materials vs COS - Direct Materials Consumables... how does one decide which to put into?

View attachment 1083

Thank you for your kind help!
Run a trial balance which will list all account codes and then match them to where they're slotting into the P&L and Balance Sheet. Presumably there is an accounts model that does the P&L and Balance Sheet based on a trial balance being dropped into it?

If it's an automated accounts model from a system, then you'll probably have to get your sleeves rolled up and take a trial balance and manually map out where each account code is going to.

Once you know what's going where, and you're happy it's correct, you can rename account code/descriptions in the chart of accounts. Just be aware though that renaming usually means 'back to the beginning'- all account codes will have the new description. So if you go down that route, make sure that you have a map of the original codes/descriptions against the new codes/descriptions in case you need to refer back to older transactions at some point.
 
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