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Guide To Understanding And Setting Up The Chart Of Accounts For Any Business

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Chart of accountsChart of accounts are those accounts which are commonly used by medium or large corporation to classify its income statement, balance sheet items in a structured way by department, expenses, incomes, assets and liabilities of an organization.

It is also a powerful tool for any organization to manage its expenses, revenue, assets and liabilities in order to understand the overall financial health of the organization. Normally all the charts of account run using accounting software which aggregate the entity financial information. The information can be sorted by department for any time frame.

Each account in the chart of accounts is typically assigned a unique number by which it can be identified. The unique number generally starts from numerical number from 1-5 where:

1 Represent Current Assets

2 Represent Current Liabilities

3 Represent Operating Incomes

4 Represent Cost of Goods Sold

5 Represent Operating Expenses

How to set up the chart of accounts?

Business owners can set up their business chart of accounts as shown below. As you can see in the table below, each account is assigned a unique number which is 5 digits long. It is the industry standard however, the business can shorten or make longer number as they wishes.

Assets Side of Balance Sheet (account numbers start with 1)

Current Assets

10100 Cash – Regular Checking

10200 Cash – Payroll Checking

10600 Petty Cash in hand

12100 Accounts Receivable

12500 Provision for bad debt

13100 Inventories

14100 Supplies

15300 Prepaid Insurance

Fixed Assets:

17000 Land

17100 Buildings

17300 Equipment

17800 Vehicles

18100 Accumulated Depreciation – Buildings

18300 Accumulated Depreciation – Equipment

18800 Accumulated Depreciation – Vehicles

Liabilities Side Of Balance Sheet (account numbers start from 2)

Current Liabilities:

20110 Notes Payable- Line#1

20210 Notes Payable -Line #2

21000 Accounts Payable

22100 Wages Payable

23100 Interest Payable

24500 Unearned Incomes

Long-term Liabilities

25100 Mortgage Loan Payable

25600 Bonds Payable

25650 Discount Payable

Stockholders’ Equity

27100 Common Stock

27500 Retained Earnings

29500 Treasury Stock

Operating Incomes (account numbers start with 3)

31010 Sales

31022 Sales

32016 Sales

33110 Sales

Cost of Goods Sold (account numbers start from 40000)

41010 Cost of Goods Sold-Line#1 (COGS)

41022 Cost of Goods Sold -Line#2 (COGS)

42016 Cost of Goods Sold -Line#3 (COGS)

43110 Cost of Goods Sold -Line#4 (COGS)

Operating Expenses (account numbers start from 5)

50100 Salaries (Marketing)

50150 Payroll Taxes (Marketing)

50200 Supplies (Marketing)

50600 Telephones (Marketing)

59100 Salaries (others)

59150 Payroll Taxes (others)

59200 Supplies (others)

59600 Telephone (others)

Following the above structure, organization can structure their chart of accounts by expense, by sales department, marketing department, Engineering department and accounting department.

Still confused about how to set up chart of accounts? Connect with expert Online Accounting Tutor right now and learn how to set up chart of accounts for your business.