Chart Of Accounts

Manager Settings > Accounts and General Ledger

The Chart of Accounts sets up, organizes, and maintains your business's accounts.

Tasks Performed:

Maintains an Accounts File (Add-Edit-Delete Accounts) that contains account information (fields) such as:

Account Name
Account Number (Optional)
Major Account Type -Asset, Liability, Equity, Revenue, or Expense
Account Group -Regular, Control, or Sub-Account

Terms and Explanations:

What Is The Chart Of Accounts ?

The Chart Of Accounts is a listing of all the individual accounts in the general ledger that contains the account's name, a brief description of the account, and optional other identifiers (codes) or a coded account number assigned to aid in recording, classifying, summarizing, and reporting transactions.

What's an Account ?

An Account is a separate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases using debits and credits for a period of time and the resulting ending balance at the end of the period. All the Individual Accounts make up or become a part of the Chart Of Accounts.

What are the Major Type of Accounts, how are they normally organized, and what are some examples ?

If you don't already know, the major types of accounts are:

Assets
Formal Definition: The properties used in the operation or investment activities of a business.
Informal Definition: All the good stuff a business has (anything with value). The goodies.
Includes: Cash, Receivables, Investments, Buildings, Land, Equipment, Vehicles, etc.

Liabilities
Formal Definition: Claims by creditors to the property (assets) of a business until they are paid.
Informal Definition: Other's claims to the business's stuff. Amounts the business owes to others.
Includes: Payables, Notes, Loans, Mortgages, etc.

Equity
Formal Definition: The owner's rights or claims to the property (assets) of the business.
Informal Definition: What the business owes the owner(s). The good stuff left for the owner(s) assuming all liabilities (amounts owed) have been paid.
Includes: Owner's Capital Invested and the Accumulated Profits or Losses for the business since it began.

Revenue
Formal Definition: The gross increase in owner's equity resulting from the operations and other activities of the business.
Informal Definition: Amounts a business earns by selling services and products and investing. Amounts billed to customers for services and/or products.
Includes:
Sales of Goods and Services - revenue directly related to daily operations.
Other Income - revenue not directly related to daily operations such as Interest and Dividends.

Expenses
Formal Definition: Decrease in owner's equity resulting from the cost of goods, fixed assets, and services and supplies consumed in the operations of a business.
Informal Definition: The costs of doing business. The stuff we used and had to pay for or charge to run our business.
Includes:
Cost of Goods Sold - the cost of the products being sold by the business.
Operating Expenses - the expenses related to daily operations such as rent, advertising, insurance, etc.
Other Expenses - the expenses not directly related to daily operations such as Interest and Financing.

How Are They Organized ?

The chart of accounts is typically organized and listed in a special order. Balance Sheet Accounts are listed first followed by the Income Statement Accounts.

Note: This USA Order may vary depending on your country.

Balance Sheet Accounts

Assets
Liabilities
Owner's (Stockholders') Equity

Normally, the order of the listing of the asset and liability accounts is based on liquidity. The most liquid accounts are listed first. Thus, when listing assets, cash is listed before accounts receivable which comes before inventory. Likewise for liabilities, accounts payable comes before notes payable because accounts payable are normally paid before notes payable.

Income Statement Accounts

Revenue and Expenses

Revenue
- Operating Revenues
- Non-operating Revenues and Gains
Expenses
- Cost Of Sales
- Operating Expenses
- Non-operating Expenses and Losses

Revenue and expense accounts tend to follow the standard of first listing the items most closely or directly related to the operations of the business. The revenues (sales) resulting from normal operations are listed before revenue or income resulting from non-operating sources. Likewise, the operating costs and expenses that are most closely related to the operations of the business are listed before the non-operating expenses. Cost of Sales is listed first followed by operating expenses and then the non-operating expenses. The operating expenses are often grouped into additional categories such as Selling Expenses and General and Administrative Expenses. There are no rigid rules as to the order that the operating expenses are listed within a category.

Detail Accounts

The categories into which transactions are classified and recorded are called accounts, and, as we discussed we have the major type of accounts; but, recording transactions into broad categories does not provide enough detail for managers to make decisions and actually use accounting information, so they are broken down further into more detailed accounts. A few examples of detailed accounts are cash, accounts receivable, accounts payable, sales, cost of goods sold, salaries & wages, rent, utilities, maintenance and insurance.

What Are Control and Sub-Accounts ?
Sub-accounts are used to divide or break a detail account into further "mini" accounts to identify, report on, and manage specific divisions of an account. The main account is also referred to as the control, parent, or summary account and the subdivided accounts are called the children. The balance of the main account (control/parent / summary) is derived from the sum of the balances of all the sub-accounts (children). For example, if you wanted to manage the various components of Motor Vehicle expenses, you could create Sub-Accounts for the Motor Vehicle expenses. An example would be as follows:

Motor Vehicle Expenses (Main - Control - Parent - Summary Account) 210-000

Sub-Accounts (Children Accounts) of Motor Vehicle Expense:

Fuel and Oil 210-010

Repairs 210-020
License Fees 210-030

What's the purpose of a Chart Of Accounts ?

It's purpose is to establish a framework for classifying, recording, and reporting on your business transactions and to use as an aid (reference) for looking up accounts and their associated account numbers when recording transactions. In a nutshell, the Chart Of Accounts is simply an organized and coded listing of all the individual accounts (detail accounts) used to record your business transactions and that also makeup the General Ledger.

The chart of accounts will:

Govern how every single transaction a business makes is recorded
Determine what information management views to make important decisions
Support government regulatory and tax filings
Organize information for presentation to bankers, owners, creditors, and auditors

Design Considerations

Designing a chart of accounts should be thought out carefully. Once it has been developed, written descriptions of which types of transactions are posted to each account are convenient reminders and can be helpful during audits, when working with accountants, and for training new users or reminding established ones. Although the effort of building a good chart of accounts produces no direct revenue, it will improve operations far into the future. A well-designed chart of accounts ultimately makes your business easier to manage and can save time and money.

Several factors should influence your design:

Laws and regulations. You may need accounts to record taxes collected or paid. If you have employees, you need accounts for wages, contributions to retirement funds, etc.
Business type. Retail shops need different accounts than repair businesses, consultants different than manufacturers, and schools different than social clubs.
Size. Larger companies with several divisions or locations need more complex charts of accounts than smaller ones.
Legal organization. Partnerships need capital accounts; sole traders or proprietors may not. Trusts and corporations have different needs, too.
Government filings. All charts of accounts should be set up to easily support filings you will make, especially tax returns. It is much easier to post transactions to accounts that match forms than to laboriously back them out of a jumble when a filing deadline approaches.
Management needs. Accounts should support management decisions during the current accounting period. They should also support comparison with previous periods. But it is pointless to collect information you cannot use.

Your accounting system, whether a manual or computerized system is built around this skeleton list of account names called the chart of accounts and is organized by the types of major accounts. The accounts you set up are tailored for your particular type of business.

If you want to review or learn more about the chart of accounts, check out my free Chart Of Accounts Tutorial.

Sample Chart Of Accounts - Income Statement

Sample Chart Of Accounts - Balance Sheet

Setting up your chart of accounts is one of the first tasks that you perform. Some software even provides you with sample charts of accounts for different types of businesses. You can modify these charts by adding new accounts and deleting accounts that you don't need.