What is a Three-Digit Chart of Accounts?

Three-Digit Chart of Accounts

A Chart of Accounts (COA) is a listing of financial accounts used in the general ledger of an organization to organize its financial transactions. The structure and length of the account numbering in a COA can vary depending on the complexity and size of an organization.

A three-digit Chart of Accounts means that each account in the COA is represented by a three-digit number. The use of three digits allows for categorization and division of accounts, but at a high level. Larger organizations with more complex financial activities might use a longer numbering system to capture more categories and subcategories of accounts.

Example of a Three-Digit Chart of Accounts

Let’s create a fictitious example using a small bakery business and a three-digit Chart of Accounts.

Bakery Biz: Three-Digit Chart of Accounts:

• Assets:
  • 100: Current Assets
    • 101: Cash
    • 102: Accounts Receivable (from customers who buy on credit)
    • 103: Baking Supplies Inventory (flour, sugar, eggs, etc.)
  • 200: Fixed Assets
    • 201: Bakery Equipment (ovens, mixers)
    • 202: Bakery Furniture (tables, chairs)
• Liabilities:
  • 300: Current Liabilities
    • 301: Accounts Payable (to suppliers)
    • 302: Short-term Loan (perhaps for initial setup)
  • 400: Long-term Liabilities
    • 401: Long-term Loan (maybe for buying bakery space or significant equipment)
• Equity:
  • 500: Owner’s Capital (initial investment by the owner)
  • 510: Retained Earnings (profits reinvested in the business)
• Revenue:
  • 600: Sales Revenue
    • 601: Bread Sales
    • 602: Pastry Sales
    • 603: Custom Cake Orders
• Expenses:
  • 700: Cost of Goods Sold (COGS)
    • 701: Ingredients Cost
    • 702: Packaging Cost
  • 800: Operating Expenses
    • 801: Salaries and Wages (for employees)
    • 802: Rent (for bakery space)
    • 803: Utilities (electricity, water)
    • 804: Marketing and Advertising

In this example, our fictitious bakery business has a basic three-digit Chart of Accounts to organize its financial transactions. The bakery tracks its assets, including current items like cash and inventory and long-term assets like equipment. It also keeps tabs on its debts, both short-term and long-term. The bakery has various revenue streams, like bread, pastries, and custom cakes. Finally, it tracks expenses associated with producing goods and running the business.

The three-digit structure allows for a broad categorization, suitable for a small business. As “Bakery Biz” grows, it may need to expand its COA to accommodate more detailed or additional accounts.