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Chart Of Accounts
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- The chart of accounts is a listing of all the accounts in the general ledger, each account accompanied by a reference number.
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- The chart of accounts lists the accounts that are available for recording transactions. In keeping with the double-entry system of accounting, a minimum of two accounts is needed for every transaction–at least one account is debited and at least one account is credited.
- When a transaction is entered into a company’s accounting software, it is common for the software to prompt for only one account name–this is because the software is programmed to automatically assign one of the accounts. For example, when using accounting software to write a check, the software automatically reduces the asset account Cash and prompts you to designate the other account(s) such as Rent Expense, Advertising Expenses , etc.
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- To set up a chart of accounts, we first need to define the various accounts to be used by the business. Each account should have a number to identify it.
- For very small businesses, three digits may suffice for the account number, though more digits are highly desirable in order to allow for new accounts to be added as the business grows. With more digits, new accounts can be added while maintaining the logical order.
- Complex businesses may have thousands of accounts and require longer account reference numbers. It is worthwhile to put thought into assigning the account numbers in a logical way, and to follow any specific industry standards
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| Overview Chart Of Accounts:[Overview of how the digits might be coded] |
| Account Numbering |
Balance Sheet Items |
| 10000 – 16999 |
Current Asset accounts |
| 20000 – 24999: |
Liability accounts |
| 3000 – 3999 |
Equity accounts |
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Income Statements |
| 4000 – 4999 |
Revenue accounts |
| 5000 – 5999 |
Cost of goods sold |
| 6000 – 6999 |
Expense accounts |
| 7000 – 7999 |
Other revenue (for example, interest income) |
| 8000 – 8999 |
Other expense (for example, income taxes) |
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- As you will see, the first digit might signify if the account is an asset, liability, etc. For example, if the first digit is a “1” it is an asset. If the first digit is a “5” it is an operating expense.
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- Within the chart of accounts you will find that the accounts are typically listed in the following order:
Balance sheet accounts
Assets
Liabilities
Owner’s (Stockholders’) Equity
Income statement accounts
Operating Revenues
Operating Expenses
Non-operating Revenues and Gains
Non-operating Expenses and Losses
- By separating each account by several numbers, many new accounts can be added between any two while maintaining the logical order.
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3.Within the categories of operating revenues and operating expenses, accounts might be further organized by business function (such as producing, selling, administrative, financing) and/or by company divisions, product lines, etc. A company’s organization can serve as the outline for its accounting chart of accounts. For example, if a company divides its business into ten departments (production, marketing, human resources, etc.), each department will likely be accountable for its own expenses (salaries, supplies, phone, etc.). Each department will have its own phone expense account, its own salaries expense, etc.
A chart of accounts will likely be as large and as complex as the company itself. An international corporation with several divisions may need thousands of accounts, whereas a small local retailer may need as few as one hundred accounts.
Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified. (Software for some small businesses may not require account numbers.) Account numbers are often five or more digits in length with each digit representing a division of the company, the department, the type of account, etc.
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- Balance sheet accounts tend to follow a standard that lists the most liquid assets first.
- Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business. For example, sales would be listed before non-operating income. In some cases, part or all of the expense accounts simply are listed in alphabetical order.
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- Different types of businesses will have different accounts. For example, to report the cost of goods sold a manufacturing business will have accounts for its various manufacturing costs whereas a retailer will have accounts for the purchase of its stock merchandise.
- Many industry associations publish recommended charts of accounts for their respective industries in order to establish a consistent standard of comparison among firms in their industry. Accounting software packages often come with a selection of predefined account charts for various types of businesses.
- There is a trade-off between simplicity and the ability to make historical comparisons. Initially keeping the number of accounts to a minimum has the advantage of making the accounting system simple. Starting with a small number of accounts, as certain accounts acquired significant balances they would be split into smaller, more specific accounts.
However, following this strategy makes it more difficult to generate consistent historical comparisons. For example, if the accounting system is set up with a miscellaneous expense account that later is broken into more detailed accounts, it then would be difficult to compare those detailed expenses with past expenses of the same type. In this respect, there is an advantage in organizing the chart of accounts with a higher initial level of detail.
- Some accounts must be included due to tax reporting requirements. For example, in the U.S. the IRS requires that travel, entertainment, advertising, and several other expenses be tracked in individual accounts. One should check the appropriate tax regulations and generate a complete list of such required accounts.
- Other accounts should be set up according to vendor. If the business has more than one checking account, for example, the chart of accounts might include an account for each of them.
SAMPLE OF A PARTIAL COMPLEX CHART OF ACCOUNTS: |
| BALANCE SHEET ITEMS(account numbers 10000 – 29999) |
25100 Mortgage Loan Payable
25600 Bonds Payable
25650 Discount on Bonds Payable |
31010 Sales – Division #1, Product Line 010
31022 Sales – Division #1, Product Line 022
32015 Sales – Division #2, Product Line 015
33110 Sales – Division #3, Product Line 110 |
41010 COGS – Division #1, Product Line 010
41022 COGS – Division #1, Product Line 022
42015 COGS – Division #2, Product Line 015
43110 COGS – Division #3, Product Line 110 |
50100 Marketing Dept. Salaries
50150 Marketing Dept. Payroll Taxes
50200 Marketing Dept. Supplies
50600 Marketing Dept. Telephone |
59100 Payroll Dept. Salaries
59150 Payroll Dept. Payroll Taxes
59200 Payroll Dept. Supplies
59600 Payroll Dept. Telephone |
91800 Gain on Sale of Assets
96100 Loss on Sale of Assets |
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| A SIMPLER Chart Of Accounts For Small Business/Less Complex Structure |
| Account Code |
CURRENT ASSETS |
| 1040 |
Savings Account |
| 1100 |
Accounts Receivable |
| 1150 |
Allowance for Doubtful Accounts |
| 1215 |
Finished Goods Inventory – Product #1 |
| 1230 |
Finished Goods Inventory – Product #3 |
| 1410 |
Employee Advances |
| 1420 |
Notes Receivable – Current |
| 1430 |
Prepaid Interest |
| 1470 |
Other Current Assets |
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FIXED ASSETS |
| 1500 |
Furniture and Fixtures |
| 1510 |
Equipment |
| 1520 |
Vehicles |
| 1530 |
Other Depreciable Property |
| 1540 |
Leasehold Improvements |
| 1550 |
Buildings |
| 1560 |
Building Improvements |
| 1690 |
Land |
| 1700 |
Accumulated Depreciation, Furniture and Fixtures |
| 1710 |
Accumulated Depreciation, Equipment |
| 1720 |
Accumulated Depreciation, Vehicles |
| 1730 |
Accumulated Depreciation, Other |
| 1740 |
Accumulated Depreciation, Leasehold |
| 1750 |
Accumulated Depreciation, Buildings |
| 1760 |
Accumulated Depreciation, Building Improvements |
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OTHER ASSETS |
| 1900 |
Deposits |
| 1910 |
Organization Costs |
| 1915 |
Accumulated Amortization, Organization Costs |
| 1920 |
Notes Receivable, Non-current |
| 1990 |
Other Non-current Assets |
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LIABILITY ACCOUNTS |
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CURRENT LIABILITIES |
| 2000 |
Accounts Payable |
| 2300 |
Accrued Expenses |
| 2310 |
Sales Tax Payable |
| 2320 |
Wages Payable |
| 2330 |
401-K Deductions Payable |
| 2335 |
Health Insurance Payable |
| 2340 |
Federal Payroll Taxes Payable |
| 2350 |
FUTA Tax Payable |
| 2360 |
State Payroll Taxes Payable |
| 2380 |
Local Payroll Taxes Payable |
| 2390 |
Income Taxes Payable |
| 2400 |
Other Taxes Payable |
| 2410 |
Employee Benefits Payable |
| 2420 |
Current Portion of Long-term Debt |
| 2440 |
Deposits from Customers |
| 2480 |
Other Current Liabilities |
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LONG-TERM LIABILITIES |
| 2700 |
Notes Payable |
| 2702 |
Land Payable |
| 2704 |
Equipment Payable |
| 2708 |
Bank Loans Payable |
| 2710 |
Deferred Revenue |
| 2740 |
Other Long-term Liabilities |
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EQUITY ACCOUNTS |
| 3010 |
Stated Capital |
| 3020 |
Capital Surplus |
| 3030 |
Retained Earnings |
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REVENUE ACCOUNTS |
| 4000 |
Product #1 Sales |
| 4020 |
Product #2 Sales |
| 4040 |
Product #3 Sales |
| 4060 |
Interest Income |
| 4080 |
Other Income |
| 4540 |
Finance Charge Income |
| 4550 |
Shipping Charges Reimbursed |
| 4800 |
Sales Returns and Allowances |
| 4900 |
Sales Discounts |
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COST OF GOODS SOLD |
| 5000 |
Product #1 Cost |
| 5010 |
Product #2 Cost |
| 5020 |
Product #3 Cost |
| 5050 |
Raw Material Purchases |
| 5100 |
Direct Labor Costs |
| 5150 |
Indirect Labor Costs |
| 5200 |
Heat and Power |
| 5250 |
Commissions |
| 5300 |
Miscellaneous Factory Costs |
| 5700 |
Cost of Goods Sold, Salaries and Wages |
| 5730 |
Cost of Goods Sold, Contract Labor |
| 5750 |
Cost of Goods Sold, Freight |
| 5800 |
Cost of Goods Sold, Other |
| 5850 |
Inventory Adjustments |
| 5900 |
Purchase Returns and Allowances |
| 5950 |
Purchase Discounts |
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EXPENSES |
| 6010 |
Advertising Expense |
| 6050 |
Amortization Expense |
| 6100 |
Auto Expenses |
| 6150 |
Bad Debt Expense |
| 6200 |
Bank Fees |
| 6250 |
Cash Over and Short |
| 6300 |
Charitable Contributions Expense |
| 6350 |
Commissions and Fees Expense |
| 6400 |
Depreciation Expense |
| 6450 |
Dues and Subscriptions Expense |
| 6500 |
Employee Benefit Expense, Health Insurance |
| 6510 |
Employee Benefit Expense, Pension Plans |
| 6520 |
Employee Benefit Expense, Profit Sharing Plan |
| 6530 |
Employee Benefit Expense, Other |
| 6550 |
Freight Expense |
| 6600 |
Gifts Expense |
| 6650 |
Income Tax Expense, Federal |
| 6660 |
Income Tax Expense, State |
| 6670 |
Income Tax Expense, Local |
| 6700 |
Insurance Expense, Product Liability |
| 6710 |
Insurance Expense, Vehicle |
| 6750 |
Interest Expense |
| 6800 |
Laundry and Dry Cleaning Expense |
| 6850 |
Legal and Professional Expense |
| 7000 |
Maintenance Expense |
| 7050 |
Meals and Entertainment Expense |
| 7100 |
Office Expense |
| 7200 |
Payroll Tax Expense |
| 7250 |
Penalties and Fines Expense |
| 7300 |
Other Taxes |
| 7350 |
Postage Expense |
| 7400 |
Rent or Lease Expense |
| 7450 |
Repair and Maintenance Expense, Office |
| 7460 |
Repair and Maintenance Expense, Vehicle |
| 7550 |
Supplies Expense, Office |
| 7600 |
Telephone Expense |
| 7620 |
Training Expense |
| 7650 |
Travel Expense |
| 7700 |
Salaries Expense, Officers |
| 7750 |
Wages Expense |
| 7800 |
Utilities Expense |
| 8900 |
Other Expense |
| 9000 |
Gain/Loss on Sale of Assets |
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