Accounting: Chart of Accounts

Every business accounting system (whether it be manual or automated) organizes the transactions recorded into accounts to distinguish the types of entries and their relationship to each other.  The master list of these accounts is referred to as the company’s Chart of Accounts.

The naming and order of accounts can be customized for each entity, but for clarity and comparability, it usually follows this sequence:

Balance Sheet:

Assets

Liabilities

Equity (or ownership)

Income Statement:

Sales

Cost of Sales

Operating Expense

Non-Operating Expense

For even the simplest organizations, at least one or two more levels of accounts are often used:

Balance Sheet:

Assets

Cash

Inventory

Receivables

Equipment

Liabilities

Accounts Payable

Accrued Expenses

Debts

Equity (or ownership)

Owner Investment

Retained Earnings (accumulated Profit/<Losses> over time)

Income Statement:

Sales – may be divided into product lines or types of service

Cost of Sales – should be as detailed as the Sales accounts

Operating Expense

Payroll

Office Expenses

Travel & Entertainment

Outside Services (phone, internet, consultants)

Period Expenses (rent, utilities, depreciation)

Corporate Expense (legal, accounting, tax preparation)

Non-Operating Expense

Interest Expense

Donations

Adjustments to prior year results

Income Tax

In computerized accounting systems, the Chart of Accounts defines the order information is displayed in the Financial Statements.  For this reason, many accountants choose to assign numbers to the accounts to more easily control the order of appearance in the reports.  Without numbers, many systems will list accounts in alphabetical order which seldom groups related accounts together.

The more complex the organization, the more detailed its Chart of Accounts will be.  If a company has multiple profit centers, it may also assign a Department to each entry in order to be able to generate reports for the management of each profit center.  If you are using QuickBooks, you can enable “Classes” in the preference section to create your own list of departments.

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