Chart of Accounts

The chart of accounts is the backbone of any accounting system. It is a listing of all the accounts in the general ledger.

The chart of accounts provides the framework for your accounting system and the basis for classification of your transactions. A properly designed chart of accounts makes data entry, reconciliations easier and created more meaningful reports.

There are five main account type categories that are universal to all businesses. These are:

• assets, 
• liabilities, 
• equity,
• revenue,
• expenses.

To set up a chart of accounts, it is necessary to first define the various accounts that will be used by the business. Different types of businesses will have different accounts. For example, to report the cost of goods sold a manufacturing business will have accounts for its various manufacturing costs whereas a retailer will have accounts for the purchase of its stock merchandise.

Many industry associations publish recommended charts of accounts for their respective industries in order to establish a consistent standard of comparison among firms in their industry.

Accounting software packages often come with a selection of predefined account charts for various types of businesses. If you choose to use one of these review each account and delete ones that are not nescessary. 

Each account should have its own unique reference number to identify it. For very small businesses, three digits may suffice for the account number, though more digits are highly desirable in order to allow for new accounts to be added as the business grows. With more digits, new accounts can be added while maintaining the logical order.

Complex businesses may have thousands of accounts and require longer account reference numbers. It is worthwhile to put thought into assigning the account numbers in a logical way, and to follow any specific industry standards.

There is a trade-off between simplicity and the ability to make historical comparisons. Initially keeping the number of accounts to a minimum has the advantage of making the accounting system simple. Starting with a small number of accounts, as certain accounts acquired significant balances they would be split into smaller, more specific accounts.