Basic Bookkeeping Online Guide » u. Chart Of Accounts http://bookkeeping.a-z-finance.net Double Entry Bookkeeping Course for Everyone Tue, 20 Jul 2010 08:11:21 +0000 en hourly 1 http://wordpress.org/?v=3.0 Chart Of Accounts:Advantages Of A Properly Classification Of Accounts http://bookkeeping.a-z-finance.net/chart-of-accountsadvantages-of-a-properly-classification-of-accounts/ http://bookkeeping.a-z-finance.net/chart-of-accountsadvantages-of-a-properly-classification-of-accounts/#comments Sat, 03 Nov 2007 08:45:02 +0000 slang http://bookkeeping.a-z-finance.net/chart-of-accountsadvantages-of-a-properly-classification-of-accounts/ In earlier article, we have discuss the Chart of accounts. This article relates particularly the advantages of setting up proper set of classified accounts.

Advantages of a properly designed classification of accounts:
  • It facilitates the recording of business transactions by the provision of suitable and self-defined ledger accounts;
  • It facilitates the preparation of financial and revenue statements without any further re-arrangement and analysis of information contained in the ledger accounts
  • It provides for expansion or alteration in the ledger accounts resulting from necessary changes in the business or industry
  • It provides the plan for the accounting records inasmuch as the original data and books of original entry will be in keeping with the particular classification desired
  • When represented by a chart of accounts ( usually contained in an Accounting manual), such acts as a guide to the staff in the recording of transactions
  • By the use of account symbols,economy in clerical effort is achieved
  • It materially aids the summarization of accounts for the purpose of comparison 
 
]]> http://bookkeeping.a-z-finance.net/chart-of-accountsadvantages-of-a-properly-classification-of-accounts/feed/ 0 Chart Of Account http://bookkeeping.a-z-finance.net/chart-of-account/ http://bookkeeping.a-z-finance.net/chart-of-account/#comments Sat, 03 Nov 2007 08:38:47 +0000 slang http://bookkeeping.a-z-finance.net/chart-of-account/ Earlier, we have learned about how we extract the balances of all the accounts in the general ledger to get the trial balance. Normally, the trial balance would have follow the company’s chart of accounts format to enable the bookkeeper to immediately prepare the financial statements namely the Income Statement and the Balance Sheet.

The chart of accounts looks very simple to set up. But in reality, it involves a lot of good planning and understanding of the particular company’s business for example the types of incomes/revenues and its various costs whether in terms of department and or cost centre. A good chart of accounts should be able to cater for the future growth of the business .

Tabulate below pertaining to the salient points about the chart of accounts

Chart Of Accounts

  • The chart of accounts is a listing of all the accounts in the general ledger, each account accompanied by a reference number.

  1. The chart of accounts lists the accounts that are available for recording transactions. In keeping with the double-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.

  1. 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 Expenses , etc.

  1. To set up a chart of accounts, we first need to define the various accounts to be used by the business. Each account should have a 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
Overview Chart Of Accounts:[Overview of how the digits might be coded]
Account Numbering Balance Sheet Items
10000 – 16999 Current Asset accounts
20000 – 24999: Liability accounts
3000 – 3999 Equity accounts
Income Statements
4000 – 4999 Revenue accounts
5000 – 5999 Cost of goods sold
6000 – 6999 Expense accounts
7000 – 7999 Other revenue (for example, interest income)
8000 – 8999 Other expense (for example, income taxes)

  1. As you will see, the first digit might signify if the account is an asset, liability, etc. For example, if the first digit is a “1″ it is an asset. If the first digit is a “5″ it is an operating expense.

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

Balance sheet accounts

Assets

Liabilities

Owner’s (Stockholders’) Equity

Income statement accounts

Operating Revenues

Operating Expenses

Non-operating Revenues and Gains

Non-operating Expenses and Losses

  • By separating each account by several numbers, many new accounts can be added between any two while maintaining the logical order.
3. 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. A company’s organization 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.
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. Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified. (Software for some small businesses may not require account numbers.) Account numbers are often five or more digits in length with each digit representing a division of the company, the department, the type of account, etc.

  • 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 items most closely related to the operations of the business. For example, sales would be listed before non-operating income. In some cases, part or all of the expense accounts simply are listed in alphabetical order.

  • 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.
  • 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.

However, following this strategy makes it more difficult to generate consistent historical comparisons. For example, if the accounting system is set up with a miscellaneous expense account that later is broken into more detailed accounts, it then would be difficult to compare those detailed expenses with past expenses of the same type. In this respect, there is an advantage in organizing the chart of accounts with a higher initial level of detail.

  • Some accounts must be included due to tax reporting requirements. For example, in the U.S. the

    IRS requires that travel, entertainment, advertising, and several other expenses be tracked in individual accounts. One should check the appropriate tax regulations and generate a complete list of such required accounts.

  • Other accounts should be set up according to vendor. If the business has more than one checking account, for example, the chart of accounts might include an account for each of them.

SAMPLE OF A PARTIAL COMPLEX CHART OF ACCOUNTS:
BALANCE SHEET ITEMS (account numbers 10000 – 29999)
25100 Mortgage Loan Payable
25600 Bonds Payable
25650 Discount on Bonds Payable
31010 Sales – Division #1, Product Line 010
31022 Sales – Division #1, Product Line 022
32015 Sales – Division #2, Product Line 015
33110 Sales – Division #3, Product Line 110
41010 COGS – Division #1, Product Line 010
41022 COGS – Division #1, Product Line 022
42015 COGS – Division #2, Product Line 015
43110 COGS – Division #3, Product Line 110
50100 Marketing Dept. Salaries
50150 Marketing Dept. Payroll Taxes
50200 Marketing Dept. Supplies
50600 Marketing Dept. Telephone
59100 Payroll Dept. Salaries
59150 Payroll Dept. Payroll Taxes
59200 Payroll Dept. Supplies
59600 Payroll Dept. Telephone
91800 Gain on Sale of Assets
96100 Loss on

Sale of Assets

A SIMPLER Chart Of Accounts For Small Business/Less Complex Structure
Account Code CURRENT ASSETS
1040 Savings Account
1100 Accounts Receivable
1150 Allowance for Doubtful Accounts
1215 Finished Goods Inventory – Product #1
1230 Finished Goods Inventory – Product #3
1410 Employee Advances
1420 Notes Receivable – Current
1430 Prepaid Interest
1470 Other Current Assets
FIXED ASSETS
1500 Furniture and Fixtures
1510 Equipment
1520 Vehicles
1530 Other Depreciable Property
1540 Leasehold Improvements
1550 Buildings
1560 Building Improvements
1690 Land
1700 Accumulated Depreciation, Furniture and Fixtures
1710 Accumulated Depreciation, Equipment
1720 Accumulated Depreciation, Vehicles
1730 Accumulated Depreciation, Other
1740 Accumulated Depreciation, Leasehold
1750 Accumulated Depreciation, Buildings
1760 Accumulated Depreciation, Building Improvements
OTHER ASSETS
1900 Deposits
1910 Organization Costs
1915 Accumulated Amortization, Organization Costs
1920 Notes Receivable, Non-current
1990 Other Non-current Assets
LIABILITY ACCOUNTS
CURRENT LIABILITIES
2000 Accounts Payable
2300 Accrued Expenses
2310 Sales Tax Payable
2320 Wages Payable
2330 401-K Deductions Payable
2335 Health Insurance Payable
2340 Federal Payroll Taxes Payable
2350 FUTA Tax Payable
2360 State Payroll Taxes Payable
2380 Local Payroll Taxes Payable
2390 Income Taxes Payable
2400 Other Taxes Payable
2410 Employee Benefits Payable
2420 Current Portion of Long-term Debt
2440 Deposits from Customers
2480 Other Current Liabilities
LONG-TERM LIABILITIES
2700 Notes Payable
2702 Land Payable
2704 Equipment Payable
2708 Bank Loans Payable
2710 Deferred Revenue
2740 Other Long-term Liabilities
EQUITY ACCOUNTS
3010 Stated Capital
3020 Capital Surplus
3030 Retained Earnings
REVENUE ACCOUNTS
4000 Product #1 Sales
4020 Product #2 Sales
4040 Product #3 Sales
4060 Interest Income
4080 Other Income
4540 Finance Charge Income
4550 Shipping Charges Reimbursed
4800 Sales Returns and Allowances
4900 Sales Discounts
COST OF GOODS SOLD
5000 Product #1 Cost
5010 Product #2 Cost
5020 Product #3 Cost
5050 Raw Material Purchases
5100 Direct Labor Costs
5150 Indirect Labor Costs
5200 Heat and Power
5250 Commissions
5300 Miscellaneous Factory Costs
5700 Cost of Goods Sold, Salaries and Wages
5730 Cost of Goods Sold, Contract Labor
5750 Cost of Goods Sold, Freight
5800 Cost of Goods Sold, Other
5850 Inventory Adjustments
5900 Purchase Returns and Allowances
5950 Purchase Discounts
EXPENSES
6010 Advertising Expense
6050 Amortization Expense
6100 Auto Expenses
6150 Bad Debt Expense
6200 Bank Fees
6250 Cash Over and Short
6300 Charitable Contributions Expense
6350 Commissions and Fees Expense
6400 Depreciation Expense
6450 Dues and Subscriptions Expense
6500 Employee Benefit Expense, Health Insurance
6510 Employee Benefit Expense, Pension Plans
6520 Employee Benefit Expense, Profit Sharing Plan
6530 Employee Benefit Expense, Other
6550 Freight Expense
6600 Gifts Expense
6650 Income Tax Expense, Federal
6660 Income Tax Expense, State
6670 Income Tax Expense, Local
6700 Insurance Expense, Product Liability
6710 Insurance Expense, Vehicle
6750 Interest Expense
6800 Laundry and Dry Cleaning Expense
6850 Legal and Professional Expense
7000 Maintenance Expense
7050 Meals and Entertainment Expense
7100 Office Expense
7200 Payroll Tax Expense
7250 Penalties and Fines Expense
7300 Other Taxes
7350 Postage Expense
7400 Rent or Lease Expense
7450 Repair and Maintenance Expense, Office
7460 Repair and Maintenance Expense, Vehicle
7550 Supplies Expense, Office
7600 Telephone Expense
7620 Training Expense
7650 Travel Expense
7700 Salaries Expense, Officers
7750 Wages Expense
7800 Utilities Expense
8900 Other Expense
9000 Gain/Loss on

Sale of Assets

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