Chart of Accounts

How To Set Up A Chart of Accounts

The chart of accounts is the numbered list of all the accounts in the ledger. In ledger, all accounts are listed with a code or a reference number. The reference number is specific to identify the accounts. Some accounts can vary business to business. You may have 100 accounts or may have 1000.

In the formation stage of the business you create the chart of accounts to establish the accounting system of your business. The accounts you include in the chart of accounts depend on the nature of business as you are in a service business you do not need to setup inventory account.

The initially created chart of accounts remains unchanged for several years so that you can compare the results in the same account over a multi-year period. A small number of accounts gradually expands the number of accounts over time; it becomes increasingly difficult to obtain comparable financial information for more than the past year. So try to create appropriate accounts in the start of business by thinking for the future.

Chart of accounts should be managed properly and do not allow everyone in your staff to change or add any account. The system should be restricted or assigned to specific persons for further change or addition with a solid reason.

There are basic five categories of accounts which should be included in your chart of accounts. These accounts are setup in a sequence in which they appear in financial statements.

Five Categories on the Chart of Accounts

  1. Assets accounts
  2. Liabilities accounts
  3. Equity accounts
  4. Revenue accounts
  5. Expenses accounts

Normally numbers are assigned to these accounts which are as follows

  1. Assets accounts 1,000
  2. Liability accounts 2,000
  3. Equity accounts 3,000
  4. Revenue accounts 4,000
  5. Expense accounts  5,000

These five accounts have further sub-accounts which all have separate identity.

Assets accounts:

  • Cash
  • Marketable Securities
  • Accounts Receivable
  • Prepaid Expenses
  • Inventory
  • Fixed Assets
  • Accumulated Depreciation (contra account)
  • Other Assets

 Liabilities accounts:

  • Accounts Payable
  • Accrued Liabilities
  • Taxes Payable
  • Wages Payable
  • Notes Payable

Equity accounts

  • Common Stock
  • Preferred Stock
  • Paid in Capital
  • Partner’s Capital
  • Member Contributions
  • Retained Earnings

Revenue accounts

  • Sales revenue
  • Service revenue

Expense accounts

  • Cost of Goods Sold
  • Advertising Expense
  • Bank Fees
  • Depreciation Expense
  • Payroll Tax Expense
  • Rent Expense
  • Supplies Expense
  • Utilities Expense
  • Wages Expense
  • Other Expenses

Chart of accounts contains the index of all the necessary accounts of the business. As mentioned above the coding or reference number of the accounts the sub-accounts can be assigned the codes under their main head. For example assets account code is 1000 so the first asset that is cash can be coded as 1010. Different main heads can be created other than these five. For example, you can create assets, receivables, inventories and prepaid expenses. Similarly, revenue of different products can be created as separate sub-accounts as:

Revenue

  • Revenue – Product 1
  • Revenue – Product 2
  • Revenue – Product 3
  • Revenue – Product 4

A detailed and well-maintained chart of accounts gives you accurate and required results. Initially created accounts also give you an advantage of detailed analysis of your business.  After detail analysis, you create all necessary and future needed accounts.


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