What is a Chart of Accounts

What exactly is a chart of accounts?

The chart of accounts is a tool that lists all of the financial accounts that appear in a company's financial statements. It allows a corporation to categorise all of its financial transactions throughout the course of a certain accounting period.

Companies frequently utilise the chart of accounts to manage their records by providing a comprehensive list of all the accounts in the company's general ledger. The graphic makes it simple to prepare data for evaluating the company's financial performance at any given period.

Accounting Chart of Accounts

The chart of accounts includes the name of each account listed, a brief description, and account-specific identifying codes. The accounts on the balance sheet appear first, followed by the accounts on the income statement.

Assets, liabilities, and shareholders equity make up the balance sheet accounts, which are further subdivided into several subcategories. Revenues and expenses are the accounts in the income statement, and these accounts are further broken down into sub-categories.

Organizing the Chart of Accounts

The accounts that are listed in a chart of accounts are often determined by the nature of the firm. In addition to the normal accounts that all businesses have, a taxi business will have some accounts that are specific to the taxi business. For example, because the taxi business is a service business that does not hold stock, it will include a fuel expense account that is not common to all businesses, but it will leave out an inventory account.

When displaying accounts in the chart of accounts, you should usually utilise a numbered system to make it easier to identify them. It's also easier to keep track of transactions when they're numbered. Small firms typically utilise three-digit numbers, whereas major businesses typically use four-digit numbers to allow for future expansion.

Each of the five primary categories is assigned a group of numbers, with blank numbers left at the end to allow for future additions of accounts. Also, the numbering should be consistent so that management can easily roll up corporate data from one period to the next.

The Chart of Accounts is divided into categories.

The balance sheet and income statement are the two primary financial statements, and each of the accounts on the chart of accounts relates to them.

Accounts on the balance sheet

When preparing a business's balance sheet, such accounts are required. The following are the accounts on the balance sheet:

1. Accounts of assets

The asset account lists all of the different types of assets that the company possesses. Intangible assets (such as trademarks, patents, and software) and current assets (such as cash on hand, accounts receivable, and inventory) may be included in the account.

Each asset account can be assigned a numerical value, such as 1000, 1020, 1040, 1060, and so on. The numbering follows the usual balance sheet structure, with current assets coming first, followed by fixed assets.

2. Accounts of Liability

Liability accounts give a list of categories for all of the debts owed to creditors by the company. Accounts payable, invoices payable, salaries payable, interest payable, and so on are examples of liability accounts that include the word "payable" in their name.

Liability accounts are organised in the same way as balance sheet accounts, with current obligations first, followed by long-term liabilities. Each liability account's numbering system can begin in the year 2000 and follow an easy-to-follow and compare sequence throughout accounting periods.

3. Accounts of owner's equity

After all of the liabilities have been deducted from the assets, the value left in the business is referred to as equity. The value of a company to its shareholders is measured by its owner's equity.

Common stock, preferred stock, and retained earnings are some of the components of the owner's equity accounts. For a large corporation, the numbering system for the owner's equity account can continue from the liability accounts and range from 3000 to 3999.