Chart of accounts MBA accounting Notes
Chart of accounts
The
chart is a list of all general ledger accounts, each account accompanied by a
reference number. Set up a chart of accounts, to first define the different
accounts to be used by the company. Each account must have a number to identify
it. For very small businesses, the three digits may be sufficient for the
account number, even if more digits is highly desirable to allow new accounts
to add the business grows. With more figures, new accounts can be added while
maintaining the logical order. Complex companies can have thousands of accounts
and require reference numbers more long account. It is interesting to put
thought by assigning the account numbers in a logical way and follow specific
industry standards. An example of how the numbers could be encoded appears in
this list:
Account
numbering
1000
- 1999: asset accounts
2000
- 2999: liability accounts
3000
- 3999: equity accounts
4000
- 4999: revenue accounts
5000
- 5999: cost of goods sold
6000
- 6999: expense accounts
7000
- 7999: other income (e.g., interest income)
8000
- 8999: other charges (for example, income taxes)
By
separating each account of several numbers, many new accounts can be added
between two while retaining the logical order.
Definition of accounts
Different
types of businesses will have different accounts. For example, to indicate that
the cost of goods sold a company manufacturing will have accounts for its
various manufacturing costs while a retailer will have accounts for the
purchase of its stock of goods. Several industry associations publish charts
recommended accounts for their respective industries to establish a uniform
standard of comparison between companies in their sector of activity.
Accounting software packages often come with a selection of predefined graphics
account for various types of businesses.
There
is a compromise between the simplicity and the ability to make historical
comparisons. Initially keep the number of accounts at least has the advantage of
making the simple accounting system. Starting with a small number of accounts,
as some accounts acquired large balances they would be divided into smaller and
more specific accounts. However, following this strategy makes more difficult
to produce coherent historical comparisons. For example, if accounting is
configured with an account of various charges that later is subdivided into
more detailed reports, then would it difficult to compare the detailed expenses
with the recent expenditure of the same type. In this regard, there is an
advantage to the Organization of the chart of accounts with an initial detail
level high.
Certain
accounts should be included because of the requirements of tax return. For
example, in the United States, the IRS requires that travel, entertainment,
advertising and many other expenses be tracked to individual accounts. Should
check the appropriate tax regulations and generate a list full of these
required accounts.
Other
accounts must be set up according to the seller. If the company has more than
one chequing account, for example, the chart may include an account for each of
them.
Order
of account
Balance
sheet accounts tend to follow a standard that lists the most liquid assets
first. Revenue and expense accounts tend to follow the standard of first
listing the points closer to the operation of the undertaking. For example,
sales appear before non-operating income. In some cases, the part or all
expense accounts are simply listed in alphabetical order.
Accounting
plan sample
Here
is an example of some of the accounts that can be included in a chart of
accounts.
Accounting
plan sample
Asset accounts Current assets
1000
Petty
cash 1010 payment by hand (e.g. in registers) 1020 regular chequing account
1030 payroll checking account 1040 1050 special savings account account 1060
Investments - 1070 money market investments - 1100 certificates of deposit
accounts receivable 1140 1150 of receivables other provisions for doubtful
accounts 1200 1205 inventory of raw materials 1210 of the inventory of supplies
inventory 1215 finished goods inventory WIP - products #1 1220 stock of
finished products - product #2 1230 stock of finished products - product #3
1400 1410 of prepaid expenses advances to employees effects to receive
1420-1430 current prepaid interest 1470 other assets
Fixed
assets
1500
Furniture
and fixtures 1510 1520 equipment vehicles 1530
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