The chart of accounts is a component of the general ledger that lists all the accounts for the business and arranges them according to five basic categories of organization.
The general ledger (GL) is an accounting record that compiles all financial transactions for the business.
It is a master document that is used to produce other accounting records and financial statements like the balance sheet, income statements, and cash flow statements.
The GL allows accountants and business managers to make informed analyses about the business, by looking at its transactions and how they impact its finances.
To facilitate this analysis, the general ledger displays transactions in groupings, or accounts, which represent certain functional aspects of the business.
These accounts are typically arranged according to five broad categories:
Income or revenue
These categories comprise the basic organizing structure of the chart of accounts, which is included in the GL.
It is included there to provide anyone who is reviewing the GL with a structured and organized overview of the business’s financial activity.
The audience might include investors, shareholders, auditors, management, and accountants.
The chart of accounts is one of four main components of the general ledger. The other three components are financial transactions, account balances, and accounting periods.
Within the five broad categories, the chart of accounts contains separate sets of accounts for the purposes of recording and organizing specific transactions.
These are referred to as subledgers or subledger accounts.
Assets may include a cash account, accounts receivable, inventory, investments, short-term assets, and fixed assets
Liabilities might include mortgage debt, bank debt, accounts payable, unpaid wages or taxes, and unearned rent
Equity refers to various forms of value gained from stock in the company, such as common stock, preferred stock, retained earnings, and contributed surplus
Revenue accounts include all manner of income for the business; this might include sales, rental income, interest income, and asset sales
Expense accounts can include a variety of expenses or costs incurred by the business for its operations including the cost of goods sold, cost of sales, repairs, maintenance, rent, wages, utilities, bank charges, and fees
The various subledger accounts within each of the five categories in the chart of accounts will vary depending on the business. For example, an ice cream shop will have accounts for expenses such as utilities, rent, and supplies.
A property management company will have revenue accounts for rental and investment income. A manufacturer will have asset accounts for inventory and expense accounts for the cost of goods sold.
The chart of accounts will be arranged in columns, and the number of columns may vary. Most chart of accounts will have at least four columns with the following headings:
Account Type (Asset, Liabilities, Equity, Expense, or Revenue)
Some chart of accounts may also have a fifth column that displays the type of financial statement where the account transactions will appear. For example, asset account transactions like cash and accounts receivable will appear on the company’s balance sheet.
Revenue account transactions like sales and rent, and expenses like fees and wages, will appear on the income statement.
The numbering system in the chart of accounts typically follows a general format, which corresponds to the structure of the five basic categories.
Sub-accounts in each category are assigned a sequential number within that category’s series of numbers:
For larger companies, additional codes representing divisions and/or departments are added in front of the three-digit account codes. In these instances, the number will be a five or seven-digit serial number, with the three-digit account number at the end.
For example, expenses in a large corporation with multiple divisions and departments might look something like 03-07-534. The first two digits, 03, represent a particular division. The second two digits, 07, represent a department. The last three digits, 534 represent a particular sub-account of expenses, such as utilities or rent.
Cash Flow Statements
Debits and Credits
Double-Entry Accounting System
The chart of accounts is an important component of the general ledger that organizes financial transactions for the business into basic categories.
It facilitates the organization and review of the business’s financial activity. It also allows for the separation of distinct types of financial activity, for example, assets from liabilities, and expenses from revenue.
All of this makes it easier for management to evaluate the different aspects of the business’s financial activity and performance.
It facilitates a similar analysis for investors and shareholders. Lastly, this makes it easier for the business to comply with financial reporting standards.
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