A chart of account is a complete list of names of all accounts that the management believes to be encountered with in the future. A chart of account provides the management with the comprehensive listing of every account in an accounting system.
A good business and financial management practice suggest that management should evaluate the spectrum of business activities keeping needs and nature of business in view. Once the range of activities and expected future dealings are identified, then management should go for developing Chart of Account. While developing a chart of account, accounts are classified according to their nature like assets, liabilities, incomes and expenses. These accounts are presented in proper sequence in the chart of accounts. Usually accounts relating to balance sheet are placed at first which includes assets, equities and liabilities. While the operating incomes and operating expenses are presented after the balance sheet accounts. Here student should know that ‘An account means unique record for each item of assets, liabilities, revenues and expenses.
The size of chart of accounts depends upon the size of business or company. If the company or its business is large, chart of account will also be large and sometimes it may goes to the thousands of accounts in a chart.
How to Setup Chart of Account
After analyzing the needs and range of activities, a comprehensive chart of account is developed which simplifies the maintenance of proper and meaningful record of transaction or business activities. While setting up chart of account, each account is assigned specific number and name for identification purposes. Most businesses use accounting software which sometimes do not need or allow account numbers to be specified. All the elements of accounting record (accounts) are assigned different numbers for more clear identification. Usually there are five or even more numbers are allotted to the accounts which represent division of company or department and type of account. Remember first digit commonly denotes nature of account like asset, liability, revenue, expense etc. For instance if the first digit is ‘1’, it might signify an asset account and if the first digit is ‘2’ it might be a liability account and so on. While assigning numbers to different nature of accounts in a chart, gap between numbers is always advisable so as to add further accounts of similar nature in future.
Template and Example
The following is a sample extract (not exhaustive) of a relatively large chart of account taken from the accounting system of a large company. This sample will certainly help in understanding the concept of chart of accounts.
Following is the sample chart of accounts for a company.
Current Assets (A/c # (code) 10000 – 14999)
10100 Cash – Petty cash
10200 Bank – Current & fixed accounts
10400 Accounts Receivable
11100 Inventory – closing stocks in trade
12100 Supplies – stores & spares 12600 Advances & deposits
13600 Pre-paid payments – insurance & others
Property, Plant, and Equipment (A/c # (code) 15000 – 16999)
15100 Land – freehold15200 Land – leasehold
16200 Plant & machinery
16600 Accumulated Depreciation – Buildings
16700 Accumulated Depreciation – Equipment
16800 Accumulated Depreciation – Vehicles
Current Liabilities (A/c # (code) 17000 – 20999)
17100 Notes Payable
186000 Accounts Payable
19100 Accruals – Wages Payable
19600 Accruals – Interest Payable
19900 Accruals – Others
20200 Unearned Revenues
Long-term Liabilities (A/c # (code) 21000 – 22999)
21100 Mortgage Loan Payable
21300 Directors’ loan payable
21800 securities received – refundable
22500 Deferred Liabilities
Shareholders’ Equity (A/c # (code) 23000 – 24999)
23100 Common Stock/shares
23500 Accumulated profits/ (losses)
24000 Treasury Stock
Operating Revenues (account numbers 25000 – 25999)
Cost of Goods Sold (A/c # (code) 26000 – 28999)
26100 COGS – Raw material consumed
26400 COGS – Direct wages
27100 COGS – Indirect wages
27400 COGS – Indirect material
27500 COGS – Work-in-process raw material
27800 COGs – Work-in-process Finished goods
Operating Cost (A/c # (code) 29000 – 31999)
29100 Salaries & wages
29500 Selling & distribution
29900 Entertainment & refreshment
30200 Utilities – Electricity, water bills
30500 Telephone & postage
30600 Traveling & conveyance
30800 Legal & professional
Financial Cost (A/c # (code) 32000 – 32999)
32100 Markup on bank borrowings
32500 Bank charges & commission
The chart of account for a small company will not necessarily contain five or more digits as above. Most of the times it has been seen that there are three numbers assigned to accounts in chart of account for small business. Similarly, the process of developing such chart of account is easier as comparing to chart of accounts for large industries and businesses.