Chart of Accounts
Your Chart of Accounts is a list of all the financial accounts you need for your business. It's the road map that guides your financial information into your accounting system. Your financial accounts represent the various types of financial transactions engaged in by your business. For example, you may pay rent, purchase equipment, and pay employees. There are five basic categories of financial accounts. These are: Assets, Liabilities, Equity, Revenues, and Expenses. Following is a brief explanation of each.
The Five Basic Account Categories
a. Current Assets — Cash or other assets that could be converted into cash within one year (such as “accounts receivable”).
b. Fixed Assets — Long-term assets such as real estate and equipment.
a. Current Liabilities — Payments due within one year, such as accounts payable and taxes.
b. Long-term liabilities — Payments due beyond one year, such as the concurrent portion of a loan.
- Equity — The difference between your assets and your liabilities. Essentially, this is what you would have left if you sold all of your assets and paid all of your debts.
a. Retained Earnings (Profits) — The accumulated earnings of your business since its inception.
Revenues — Income received by your business. This will be mostly from sales, but could also include income from rents, commissions, interests, gifts and so forth.
a. Variable Expenses — Operating expenses that vary in some proportion to sales. For example, sales wages and manufacturing costs will increase or decrease as a result of a change in sales.
b. Fixed Expenses — Operating expenses that do not vary in proportion to sales. For example, rent and management wages will remain relatively fixed despite any change in sales.
Below is a sample Chart of Accounts. The numbering system helps to organize the basic account categories into groups and is typically similar for all companies. The specific accounts within these categories, however, may vary from company to company.
Basic Account Categories
Example: Chart of Accounts
1000 Current Assets
1025 Accounts Receivable
1030 Allowance for Doubtful Accounts
1040 Prepaid Expenses
1100 Fixed Assets
1120 Leasehold Improvements
1125 Furniture and Fixtures
1130 Office Equipment
1145 Accumulated Depreciation - Building
1150 Accumulated Depreciation - Vehicles
1155 Accumulated Depreciation - Leasehold
1160 Accumulated Depreciation - Furniture and Fixtures
1165 Accumulated Depreciation - Office Equipment
1170 Accumulated Depreciation - Equipment
1175 Accumulated Depreciation - Machinery
1200 Other Assets
1205 Patents and Copyrights
1210 Franchise Fees Paid
1215 Other Assets
2000 Current Liabilities
2005 Accounts Payable
2010 Accrued Expenses
2015 Accrued Rent
2020 Bank Loan
2025 Credit Line Balance Payable
2030 Commissions Payable
2035 Salaries Payable
2040 Payroll Taxes Payable
2045 Federal Sales Tax Payable
2050 Provincial Sales Tax Payable
2055 GST Collected
2060 GST Paid
2065 Customer Deposits
2070 Current Portion of Long Term Debt
2075 Federal Income Tax Payable
2080 Provincial Income Tax Payable
2085 Other Current Liabilities
2100 Long-term Liabilities
2105 Mortgage Payable
2110 Bank Loan
2115 Other Long-term Liabilities
3005 Common Stock
3010 Preferred Stock
3015 Paid-in Capital
3020 Retained Earnings
3025 Owner's Draw
4005 Sales - Products
4010 Sales - Services
4015 Other Income
4020 Returns and Allowances
5000 Variable Expenses
5005 Product Costs
5010 Shipping Direct
5020 Sales Commissions
5025 Telephone (sales related)
5100 Fixed Expenses
5115 Indirect Sales and Promotion
5145 Wages and Salaries (indirect)
5150 Management Salaries
5155 Travel and Entertainment
Review your Chart of Accounts line by line to determine its effectiveness. Ask yourself how it could be improved. You may have categories you don't use or you may need to break some categories up in order to present a more detailed view of your finances.
Exactly how many accounts you might need is up to you, but be as specific as you can, especially concerning your sales and administrative expenses. That way, you'll have more details to draw from when you analyze your financials. It often makes sense, for example, to set up accounts for each of the different products or services you sell. If this seems unreasonable, you should at least set up accounts for each category of products or services you sell. That way you can monitor the financial impact they each have on your business. Your bookkeeper or accountant will be able to help you with this as well.
The best time to update your Chart of Accounts is at your fiscal year-end. This way your accounting information stays consistent throughout the year as well.
If you are updating your Chart of Accounts, what additions or deletions will you make?