The chart of accounts lists all the financial accounts included in the financial statements of a company. It gives a way to categorize all the financial transactions that a company conducted during a specific accounting period. It also helps stakeholders to interpret a company’s financial performance with ease. The chart of accounts has four columns which are account number, account description, account type, and financial statement. The chart of accounts features five account types: Asset, Liability, Equity, Income, and Expense. The first three account types affect the balance sheet, and the last two impact the income statement.
What is a Chart of Accounts?
The chart of accounts lists all of a company’s accounts together in one place. It provides an overview of every area of the company that spends or makes money. The chart of accounts is an organizational tool that provides a breakdown of all the financial transactions that a company conducted during a specific accounting period, broken down into subcategories. The main account types include Revenue, Expenses, Assets, Liabilities, and Equity. The chart of accounts separates out all the company’s most important accounts and makes it easy to figure out which transactions get recorded in which accounts.
What does a Chart of Accounts Contain?
The chart of accounts has four columns that are labeled as Account Number, Account Type, Account Description, and Financial Statement. The Account Number is the unique code that is given to each account. It depicts the numbering of the chart of accounts. The Account Type is the nature of each account.
Listed below are the types of accounts; these include Assets, Liability, Equity, Income, and Expense.
- Assets category: The chart of accounts Assets category comprises fixed assets, intangible assets, inventory, and current assets like cash, and trade receivables.
- Liability category: The chart of accounts Liability category involves long-term and short-term borrowings, trade payable, interest payable, and other current liabilities.
- Equity category: The chart of accounts Equity category includes equity share capital, preference share capital, and reserve and surplus.
- Revenue category: The chart of accounts Revenue category involves sales revenue, interest received, income from scrap, or any other earnings.
- Expenses category: The chart of accounts Expenses category comprises the cost of goods sold, rent, electricity, salary and wages, and any other business expense.
What is the Function of a Chart of Accounts?
The chart of accounts serves as the foundation for a company’s financial record-keeping system. It provides a logical structure that facilitates the addition of new accounts and the deletion of old accounts. Without a chart of accounts, it would be difficult to keep financial transactions of a business organized.
What are the Two Primary Accounts on a Chart of Accounts?
Listed below are the two primary accounts on a Chart of Accounts, which are the Balance Sheet Account and the Income Statement Account.
- The balance sheet accounts consist of the asset accounts, liability accounts, and owner’s equity accounts. Asset accounts are a list of all the assets that a company owns. This includes intangible assets such as trademarks, patents, and software. Liability accounts list all the debts that the business owes its creditors. Such as accounts payable, invoices payable, salaries payable, interest payable, etc. The owner’s equity accounts list the value that is left in a business after subtracting all the liabilities from the assets. It measures how valuable the company is to the shareholders of the company.
- The Income Statement Accounts include revenue accounts and expense accounts. Revenue accounts record the incomes that a company earns from selling its products and services. It only includes revenues that are related to the core functions of the company. The expense accounts include a list of all the accounts used to capture the money spent on generating revenues for the business.
How to Make a Chart of Accounts?
When setting up accounts in the chart of accounts, you will need to use a numbering system for easy identification. Numbering also makes it easy to record a transaction. The five main categories on the charts of accounts are assigned groups of numbers. The numbering should remain consistent to make it easier for management to roll up information of the company from one period to the next.
Listed below are the steps to setting up a chart of accounts.
- Create Business Account Names: The account name is the given title of the business account you’re reporting on.
- Assign Account Numbers to Business Accounts: Account numbers are the numbers assigned to each account name. The most common number sequences for each account are listed below.
- Assets: 1,000 to 1,999
- Liabilities: 2,000 to 2,999
- Income: 4,000 to 4,999
- Operating expenses: 6,000 to 7,999
- Organize the Account Names into one of the Four Account Category Types: Each of your account names should be assigned an account type or general ledger. Choose from the four main account types: asset, liability, income, and expense.
What is Listed First in the Chart of Accounts?
The first category in the chart of accounts is the account number. This makes it easier to quickly identify the account and what type of account from the number. Account numbers are not arbitrarily assigned and instead follow a system that is expounded upon later in this blog.
How to Maintain a Chart of Accounts?
Listed below are the important tips to follow when maintaining a chart of accounts.
- Wait to delete old accounts. You should wait until the end of the year to delete old accounts so that you do not create issues during tax season. It is ok to add new accounts at any time.
- Don’t go overboard with your accounts. The chart of accounts should only have important information. You do not need to record every single detail.
- Aim for consistency. The chart of accounts should be similar each year. It will allow you to compare the performance of different accounts over time.
- Prune your accounts. You may be able to consolidate your accounts at the end of the year, so it is important to be aware of similar accounts.
How should a Chart of Accounts be Numbered?
Numbering a chart of accounts is easy once you recognize what type of account you are looking at, especially once you become familiar with the numbering system.
- 1000 –Assets
- 2000 –Liabilities
- 3000 –Equity
- 4000 –Income
- 5000 –Cost of Goods Sold
- 6000 –Operating Expenses
- 7000 – 9000 Non-operating Income and Expenses
The same account name can be used twice if they are mapped to a different group, but the same number cannot be used twice. Numbers are useful when an account has the same name under Income as one under Expenses. Account numbers help to control the order of accounts, it can be used to make the financial statement easier to read.
Is there a Standard Chart of Accounts?
Yes, there is a Standard Chart of Accounts. A standard chart of accounts is a company’s chart of accounts with a numbered list of the accounts that comprise the company’s general ledger. The company’s chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. The standard chart of accounts is also called the uniform chart of accounts.
What is the Chart of Accounts in SAP?
The chart of accounts in SAP has three categories which are; operating, group and country-specific. The operating chart of accounts comprises accounts used to record regular business transactions, like expenses and revenue accounts. The group chart consists of standard accounts applicable at the corporate level by all the business units. The country-specific chart is useful to maintain accounts as per the legal requirements of a particular country.
Is the Chart of Accounts Changing?
The chart of accounts can change for a few reasons, but one reason for changing the chart of accounts is to better match how the business is organized. If the chart of accounts was established when the business was much smaller, with fewer products, fewer customers, fewer managers, and now the company’s larger, then the chart of accounts requires more detailed reporting. Another reason for changing the chart of accounts is a company’s decision to acquire and install a new computerized system for controlling its operations.
What is the Difference Between a Chart of Accounts and a General Ledger?
The general ledger is the bookkeeping system used to record the financial transactions an agency or organization conducts. The general ledger is where all accounting and financial entries are found, and that information is used to create financial statements. The chart of accounts is a list of all accounts used to record financial position and activity in the general ledger. The biggest difference is that the general ledger tracks a company’s accounts over the life of the business. The chart of accounts is a more immediate reflection of the company, in that it only shows accounts that are currently open. The chart of accounts is made up of all the necessary accounts for a company’s transactions: assets, liabilities, and equity. As well as the company’s income, revenue, and expenses.