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Chart Of Accounts

Lectures & Insights > Bean Counter Mini Lectures
Chart Of Accounts

Dave refers to the Chart Of Accounts as the Red Headed Step Child. I guess you wonder why -?  He told me that many of the textbooks and courses that he has looked at 'gloss' over the chart of accounts and don't give the topic the attention and respect it deserves.

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.

Your accounting 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.

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.

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. 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.  

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 or 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.

Why Is The Chart Of Accounts Important -?  Setting up a chart of accounts is one of the first, if not the first, task you perform when setting up an accounting system whether a manual or computerized system. A business needs and should want to know where the money is coming from and where it is going !!! Your chart of accounts is a tool for gathering and organizing this type of information.  

A business must have useful information in order to be able to survive in today's competitive business world. You notice that I said information - raw data is not very useful until it has been 'massaged' and summarized into meaningful information. Your accounting system should be designed and used to provide much of this detailed, summarized, and needed information.

The information available for your financial reports (summary and or detailed) often depends on how well you designed your chart of accounts. One of the main keys to a properly designed accounting system is your chart of accounts. The chart of accounts is the Foundation that your financial record keeping system is built upon. In a nutshell, the Chart Of Accounts is simply an organized and coded listing of all the individual accounts used to record your business transactions and that also makeup the General Ledger. It is a major key to a business having the information needed for managing and reporting its activities.

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