Introduction to Chart of Accounts

· Reading Time: 6 minutes
Sharing means caring!

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger. A company has the flexibility to tailor its chart of accounts to best suit its needs, including adding accounts as needed.

A company's organizational chart can serve as the outline for its accounting chart of accounts. For example, if a company divides its business into ten departments (production, marketing, human resources, etc.), each department will likely be accountable for its own expenses (salaries, supplies, phone, etc.). Each department will have its own phone expense account, its own salaries expense, etc.

Already we have known Fundamentals of Accounting, US GAAP vs IFRS Accounting System, and Three Golden Rules of Accounting.

Now a chart of accounts will likely be as large and as complex as the company itself. An international corporation with several divisions may need thousands of accounts, whereas a small local retailer may need as few as one hundred accounts.

Within the chart of accounts, you will find that the accounts are typically listed in the following order:

Within the categories of operating revenues and operating expenses, accounts might be further organized by business function (such as producing, selling, administrative, financing) and/or by company divisions, product lines, etc.

Sample Chart of Accounts for a Small Company

This is a partial listing of another sample chart of accounts. Note that each account is assigned a three-digit number followed by the account name. The first digit of the number signifies if it is an asset, liability, etc. For example, if the first digit is a "1" it is an asset, if the first digit is a "3" it is a revenue account, etc. The company decided to include a column to indicate whether a debit or credit will increase the amount in the account. This sample chart of accounts also includes a column containing a description of each account in order to assist in the selection of the most appropriate account.

Asset Accounts

Liability Accounts

Owner's Equity Accounts

Operating Expense Accounts

Operating Revenue Accounts

Non-Operating Revenues and Expenses, Gains, and Losses

Accounting software frequently includes sample charts of accounts for various types of businesses. It is expected that a company will expand and/or modify these sample charts of accounts so that the specific needs of the company are met. Once a business is up and running and transactions are routinely being recorded, the company may add more accounts or delete accounts that are never used.

At Least Two Accounts for Every Transaction

The chart of accounts lists the accounts that are available for recording transactions. In keeping with thedouble-entry system of accounting, a minimum of two accounts is needed for every transaction—at least one account is debited and at least one account is credited.

When a transaction is entered into a company's accounting software, it is common for the software to prompt for only one account name—this is because the software is programmed to automatically assign one of the accounts. For example, when using accounting software to write a check, the software automatically reduces the asset account Cash and prompts you to designate the other account(s) such as Rent Expense, Advertising Expense, etc.

Some general rules about debiting and crediting the accounts are mentioned below:

  • Asset accounts normally have debit balance
  • Liability accounts normally have credit balances
  • Expense accounts are debited and have debit balance
  • Revenue accounts are credited and have credit balance
  • To increase an asset account, debit the account
  • To decrease an asset account, credit the account
  • To increase a liability account, credit the account
  • To decrease a liability account, debit the account
Sharing means caring!