The Chart of Accounts

The chart of accounts is a listing of all accounts used in the general ledger, usually sorted in order by account number. The accounts are usually numeric, but can also be alphabetic or alphanumeric. The account numbering system is used by the accounting software to aggregate information into an entity's financial statements.

Accounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement. Thus, the chart of accounts begins with cash, proceeds through liabilities and shareholders' equity, and then continues with accounts for revenues and then expenses. Many organizations structure their chart of accounts so that expense information is separately compiled by department; thus, the sales department, engineering department, and accounting department all have the same set of expense accounts.

Typical accounts found in the chart of accounts are:

Assets:

• Cash
• Marketable Securities
• Accounts Receivable
• Prepaid Expenses
• Inventory
• Fixed Assets
• Accumulated Depreciation (contra account)
• Other Assets

Liabilities:

• Accounts Payable
• Accrued Liabilities
• Taxes Payable
• Wages Payable
• Notes Payable

Stockholders' Equity:

• Common Stock
• Retained Earnings

Revenue:

• Revenue
• Sales returns and allowances (contra account)

Expenses:

• Cost of Goods Sold
• Advertising Expense
• Bank Fees
• Depreciation Expense
• Payroll Tax Expense
• Rent Expense
• Supplies Expense
• Utilities Expense
• Wages Expense
• Other Expenses

There are a number of ways to structure the chart of accounts. Click here for an example of three-digit codes, here for an example of five-digit codes, and here for an example of seven-digit codes.

Chart of Accounts Best Practices

The following points can improve the chart of accounts concept for a company:

• Consistency. It is of some importance to initially create a chart of accounts that is unlikely to change for several years, so that you can compare the results in the same account over a multi-year period. If you start with a small number of accounts and then gradually expand the number of accounts over time, it becomes increasingly difficult to obtain comparable financial information for more than the past year.
• Lock down. Do not allow subsidiaries to change the standard chart of accounts without a very good reason, since having many versions in use makes it more difficult to consolidate the results of the business.
• Size reduction. Periodically review the account list to see if any accounts contain relatively immaterial amounts. If so, and if this information is not needed for special reports, shut down these accounts and roll the stored information into a larger account. Doing this periodically keeps the number of accounts down to a manageable level.

If you acquire another company, a key task is shifting the acquiree's chart of accounts into the parent company's chart of accounts, so that you can present consolidated financial results. This process is known as mapping the acquiree's information into the parent's chart of accounts.