Why and How to develop a chart of accounts for your business

Chart of accounts is a list of accounts that a company has made available for recording financial transactions in its general ledger. It serves as an index of all the company’s financial accounts. Company can add accounts to it any time as needed.

Chart of accounts is divided into balance sheet and income statement account, which is further grouped into assets, liabilities, stockholders equity, operating revenues, operating expenses and indirect expenses.

Within these groups, accounts are further subgrouped under different heads (known as account type) based on the type and complexity of business.

For instance, assets is further subdivided to current and noncurrent assets.

Based on the size of the business, chart of accounts can be grouped under various sub heads.

In all most all accounting softwares, chart of accounts functionality is used to record financial transactions for a particular period.

Each category in the list is assigned to a number range to help identify the account type used by a general ledger account while posting a transaction. For instance, you can assign current assets to the number range of 000001 to 100000 and non-current assets to the number range of 100001 to 200000.

For a small organisation, a chart of account might include followings:

• Assets
  • Current assets
    • A/c receivable
    • Marketable securities
    • Prepaid expenses
    • Inventory
    • Cash
    • Petty cash balance
    • Bank

• Non-Current Assets
  • Fixed Assets
  • Accumulated depreciation
  • Other assets

• Liabilities
  • Current Liabilities
    • A/c Payable
    • short-term debts
    • Taxes payable
    • Wages payable
  • Non-current Liabilities
• Owner’s Equity
  • Common stock
  • Preferred stock
  • Retained earnings
• Revenue
  • Sales revenue
  • Sales return and allowances
  • Interest income
• Expenses
  • Cost of goods sold
  • Operating, general and administrative expenses
  • Other expenses

Revenue, expenses and other financial data organized and presented into a financial statement based on the account groupings. Before implementing any accounting software or ERP, the first and foremost thing you should finalize is the company’s chart of accounts and its hierarchy.