What is a “Chart of Accounts”?

May 7, 2013 3:13 pm2 commentsViews: 176

CHART

When a company’s accounting system is set up, the accounts most likely to be affected by the company’s transactions are identified and listed out.  This list is referred to as the company’s chart of accounts.   The list consists of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.  Depending on the size of a company and the complexity of its business operations, the chart of accounts may list as few as thirty accounts or as many as thousands.  A company has the flexibility of tailoring its chart of accounts to best meet its needs.

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Within the chart of accounts you will find that the accounts are typically listed in the following order:

Balance sheetaccounts

  • Assets
  • Liabilities
  • Owner’s (Stockholders’) Equity

Income statement accounts

  • Operating Revenues
  • Operating Expenses
  • Non-operating Revenues and Gains
  • Non-operating Expenses and Losses

The asset accounts in the balance sheet maybe classified as current assets or non-current assets and consist of cash, accounts receivable, inventories, prepaid assets and fixed assets.  The liability accounts, which can be classified as either current liabilities or long-term liabilities, consist of accounts payable, notes payable, loans payable and other payables.  The owner’s equity accounts consist of common stock and retained earnings.

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The income statement accounts consist of sales and other operating revenues, cost of sales, marketing expenses, payroll expenses and other expenses which can be classified as operating or non-operating in nature.   

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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.

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A company’s organization chart can serve as the outline for its accounting chart of accounts. For example, if a company divides its business into 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.

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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.

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2 Comments

  • Max Fabricante

    Who sets up the accounting system? Who approves the chart of accounts to use?

    • CPA In Virtual Business

      An accountant is usually hired to do the role of setting up the chart of accounts for a company, especially in a corporate set-up. For a small business entrepreneur or start-up company, the owner may decide to seek help from a bookkeeper or freelance accountant. Thanks for the queries. We will add a follow-up article showing examples on how to set-up one.

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