you What if you had to retrieve the dollar amount on an invoice that was issued a year ago? You might have to sort through a pile of paperwork for hours, going by the order of the time of filing. There may be even more problems that will occur, such as missing documents.
What if you had to report on all notes payable within the three months that followed? It would be an even more hectic process. This is where using a chart of accounts shows its usefulness.
In this blog, we teach you everything there is to know about the chart of accounts.
What is the chart of accounts?
In simple terms, the chart of accounts is a way of organizing all financial accounts that an organization has. This includes records for each type of asset, liability, equity, revenue, and expense, which are organized into a variety of specific accounts.
In many instances, organizations consolidate accounts of the same type for easier tracking and logging and the charter of accounts is a key tool to help organize an organization’s financial record-keeping system.
Prior to the internet, many back office teams at organizations would set up separately-labeled drawers for this type of paperwork processing. Fortunately, those days are all but behind us and many teams are turning to accounting software to automate this document-keeping process. And rightly so. Automating the labeling and categorizing of account entries is far, far easier than the old-fashioned approach.
What’s interesting about the chart of accounts is that its complexity often follow the complexity of an organization’s operational processes. The complexity of a chart of accounts is directly correlated to the complexity of the business. There may be hundreds of categories and sub-categories of accounts, depending on the size of the organization and the way it manages critical operations.
In most instances, though, the chart of accounts contains the name of the account, account numbers, and a brief description. Nothing more, nothing less. It’s also common practice to list how the record appears in financial statements. Balance sheet accounts usually appear first, and then the income statement accounts.
Balance sheet accounts
A balance sheet refers to a financial statement that reports an organization’s assets, liabilities, and shareholder equity at a specific point in time. These accounts provide a basis for things like rates of return for investors, as well as providing understanding about an organization’s capital structure.
Within each area of balance sheet accounts, there are:
- Petty cash
- Marketable securities
- Accounts receivable
- Allowance on doubtful accounts
- Prepaid expenses
- Fixed assets
- Accounts payable
- Accrued liabilities
- Taxes payable
- Wages payable
- Notes payable
- Common stock
- Preferred stock
- Retained earnings
Once balance sheet accounts are recorded, it’s time to look at income statement accounts.
Income statement accounts
Income statement accounts are relatively easy to understand. These accounts are logged in the general ledger and are used in an organization’s profit and loss statement. Also known as the profit and loss statement or the statement of revenue and expense, the income statement primarily focuses on the company’s revenues and expenses during a particular period.
Within these accounts, there’s:
- Cost of goods sold
- Bank fees
- Depreciation expense
- Payroll tax expense
- Supplies expense
- Utilities expense
- Wages expense
Income statement accounts are far simpler to understand than balance sheet accounts, and both comprise the chart of accounts. Within the chart of accounts, the most important pieces to consider are assets, liabilities, revenue, and expense accounts, as having the ability to separate these accounts gives a high-level overview of a organization’s financial health.
Here’s a breakdown of those areas.
What does an organization own?
First of all, there are current assets, which are assets that can be easily liquidated. This includes things like cash in the bank, money market accounts, accounts receivable, and inventory.
Second, there’s fixed assets, which are more difficult to liquidate, including office equipment, vehicles, heavy machinery, and land. Examples of categories under assets would be deposited funds, prepaid insurance, and company vehicles.
What does the organization owe? A good example is an outstanding loan.
Any account denoted by ‘loan’ or ‘payable’ is a liability. Liabilities are categorized as short, medium, and long-term liabilities. Examples of accounts that would be categorized as liabilities include vehicle loans, the mortgage on an office building, and payroll dues.
Where does the organization’s money come from?
Sources of revenue include product and service sales, professional fees, royalties, commissions, etc. Revenue that does not come from the day-to-day business is categorized as other income. Chart of accounts examples that would be under revenue includes service income (e.g. training), labor income (e.g. construction), and reimbursement income (e.g. mileage).
What payments does the organization make regularly?
Some examples include utility expenses (gas, water, internet) and professional services, like legal services, insurance, and medical costs. An expense that is one-off is typically labeled as an other expense. Examples of accounts under expenses include wages expense, supplies expense, prepaid expenses, bank charges, and depreciation expenses.
A chart of accounts is useful for any size of the organization, whether small or large. It makes finding financial documents and recording financial information on the general ledger much easier and efficient.
Adjusting your chart of accounts
The rules for making tweaks to your chart of accounts are simple. You can add accounts at any time of the year, but you must wait until the end of the year to delete old accounts. If you delete an account in the middle of the year, it might mess up your books. And that’s a recipe for disaster.
To find out more about how Procurify integrates into your accounting system to streamline your chart of accounts, visit our website today.
Editor's note Original publish date: 10 July 2018 Original author: Dani Hao We've since updated and republished this blog post with new content.