What Is A Chart of Accounts in Business Accounting?
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:
- Equity (or ownership)
- 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:
- Accounts Payable
- Accrued Expenses
Equity (or ownership)
- Owner Investment
- Retained Earnings (accumulated Profit/<Losses> over time)
Sales – may be divided into product lines or types of service
Cost of Sales – should be as detailed as the Sales accounts
- Office Expenses
- Travel & Entertainment
- Outside Services (phone, internet, consultants)
- Period Expenses (rent, utilities, depreciation)
- Corporate Expense (legal, accounting, tax preparation)
- Interest Expense
- 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.