The Chart of Accounts
The chart of accounts is a listing of all accounts used in
the general ledger of an organization. The chart is used by the accounting
software to aggregate information into an entity's financial statements.
The chart is usually sorted in order by account number, to
ease the task of locating specific accounts. The accounts are usually numeric,
but can also be alphabetic or alphanumeric.
Accounts are usually listed in order of their appearance in
the financial statements, starting with the balance sheet and continuing with
the income statement. Thus, the chart of accounts begins with cash, proceeds
through liabilities and shareholders' equity, and then continues with accounts
for revenues and then expenses. Many organizations structure their chart of
accounts so that expense information is separately compiled by department;
thus, the sales department, engineering department, and accounting department
all have the same set of expense accounts.
Typical accounts found in the chart of accounts are:
Assets:
- Cash
- Marketable Securities
- Accounts Receivable
- Prepaid Expenses
- Inventory
- Fixed Assets
- Accumulated Depreciation (contra account)
- Other Assets
Liabilities:- Accounts Payable
- Accrued Liabilities
- Taxes Payable
- Wages Payable
- Notes Payable
- Common Stock
- Retained Earnings
- Revenue
- Sales returns and allowances (contra account)
- Cost of Goods Sold
- Advertising Expense
- Bank Fees
- Depreciation Expense
- Payroll Tax Expense
- Rent Expense
- Supplies Expense
- Utilities Expense
- Wages Expense
- Other Expenses
There are a number of ways to structure the chart of
accounts. Click here for an example of three-digit codes, here for an example
of five-digit codes, and here for an example of seven-digit codes.
Chart of Accounts Best Practices
The following points can improve the chart of accounts
concept for a company:
- Consistency. It is of some importance to initially create a chart of accounts that is unlikely to change for several years, so that you can compare the results in the same account over a multi-year period. If you start with a small number of accounts and then gradually expand the number of accounts over time, it becomes increasingly difficult to obtain comparable financial information for more than the past year.
- Lock down. Do not allow subsidiaries to change the standard chart of accounts without a very good reason, since having many versions in use makes it more difficult to consolidate the results of the business.
- Size reduction. Periodically review the account list to see if any accounts contain relatively immaterial amounts. If so, and if this information is not needed for special reports, shut down these accounts and roll the stored information into a larger account. Doing this periodically keeps the number of accounts down to a manageable level.
If you acquire another company, a key task is shifting the
acquiree's chart of accounts into the parent company's chart of accounts, so
that you can present consolidated financial results. This process is known as
mapping the acquiree's information into the parent's chart of accounts.
SOURCE BY: ACCOUNTING TOOLS(R)
