Chart of Accounts

The Chart of Accounts is a listing of all accounts recording business transactions and accounting entries. Each account is assigned a reference number. All accounts are assigned to one of 5 broad categories (Assets, Liabilities, Equity, Revenue, and Expenses).

Most accounting systems assign a block of numbers to each of the 5 broad categories. Each account in each of the broad categories are assigned a number from their respective block of numbers. Most small businesses use 4 digit reference numbers. When the Chart of Accounts is initially created, gaps are left in the numbering sequence to allow more accounts to be inserted as your business changes while maintaining the logical order.

Government, universities, and large complex businesses may have thousands of accounts and require longer account reference numbers. Some industries, like restaurants, motel chains, and home builders, have developed a set of predefined accounts and reference numbers. If you want to be able to compare your business to the rest of your industry, you should use either the industry predefined chart of accounts, or one that closely resembles what is used by your industry.

• 1000 - 1999 Asset accounts
• 2000 - 2999 Liability accounts
• 3000 - 3999 Equity accounts
• 4000 - 4999 Revenue (income) accounts
• 5000 - 5999 Cost of Goods sold (job costs)
• 6000 - 6999 Expense (overhead costs) accounts
• 7000 - 7999 Other revenue (income not related to creating products)
• 8000 - 8999 Other expenses (expenses not related to creating products)

The amount of detail in your Chart of Accounts should be determined by a number of factors. The minimum amount of detail should allow you to meet the necessary government and financial reporting requirements. For example, in the U.S., businesses are required to report several expenses (advertising, travel, entertainment, etc.) as separate expenses. It makes sense to have separate accounts for each of these expenses. An advantage of having an initial level of more detailed accounts is that future comparisons are easier to perform, and provide more meaningful results.

For example, lets assume you sell five different software products and different licenses and prices, and you have just one account for total sales. Over the course of a couple of years, you've changed some of your product prices, you've changed your advertising methods, and you've also noticed a downward trend in total sales. If you had only one account, 'total sales', you would not be able to determine from the total sales numbers which products are the leading cause of the decline. If you grouped advertising for all products in one account, you would not be able to determine if advertising for different products is cost effective. Your advertising program may be cost-effective for two of the products, and a total waste of money for the other three.

If you have too many accounts, it can make your bookkeeping more difficult and time consuming than it needs to be. Your business could have one account for 'Postage Stamps on Hand', or separate accounts for each stamp denomination. In the end, you have to decide the level of detail you want and need to make effective business decisions without wasting your time.

Different types of businesses will need different accounts within the main account groups. A retail store would have accounts for different types of merchandise. A manufacturer would have different accounts for the materials needed to create their products. A retail store would include an account for cash in the registers, and multiple vendors. The legal structure of the business (sole proprietorship, partnership, or corporation) require different accounts. For example, a corporation would have accounts for retained earnings and dispersed dividends. Your business may have multiple bank accounts because you decided to switch to a new bank. A generic Chart of Accounts will always need to be customized for your business. Over time, it will also need to be revised as business relationships change.

The following list can be used to develop your Chart of Accounts for your business. Some of the accounts will not be useful to you. Some of the accounts will need to be expanded for your specific needs.