A chart of accounts is a way to keep track of, organize, and record all your business’s finances. It’s a list in your company’s general ledger of your business’s accounts, divided into the categories of Asset Accounts, Liability Accounts, Equity Accounts, Revenue Accounts, and Expense Accounts. Your business’s chart of accounts provides a snapshot of your company’s financial standing.
Below, we’ll discuss why a chart of accounts is so important for your small business; how to make a chart of accounts, and some common account types.
- A chart of accounts is a list in your business’s general ledger; it’s a crucial part of keeping your company’s financial transactions organized.
- A chart of accounts is divided into categories; assets, liabilities, and equity make up the balance sheet, and revenue and expenses comprise the income statement.
- A numbering system helps organize a chart of accounts, and the number of accounts listed reflects your company’s size.
What Is a Chart of Accounts?
A chart of accounts is an important component of bookkeeping that allows a business owner to index and keep track of all monetary transactions in which the business engages. The list is part of a business’s general ledger that breaks down and classifies financial activity into categories.
A chart of accounts is arranged with a numbering system to help keep the recordkeeping process more organized. Below, we'll delve into the different types of accounts and how to number them.
The numbers that make up a business’s chart of accounts come from its everyday goings-on, such as overhead costs and customers paying for services, as well as the parts of the business you don’t think about every day, like owner equity or company debt.
How To Make a Chart of Accounts
While creating a chart of accounts can be done using a spreadsheet, there’s also accounting software available designed to help facilitate your bookkeeping process. We’ll walk through the basic steps of making a chart of accounts.
Title Your Business Accounts
A chart of accounts usually consists of three main columns. Start by assigning names to your business accounts—descriptions such as “Equipment,” “Accounts Payable,” and “Utilities.” This will be the middle column of your chart.
Coordinate Account Numbers
Next, you’ll need to give each of your five main categories account numbers. These are commonly listed in the first column. Typically, the categories are numbered as follows (the example below represents a medium-sized business):
- Asset Accounts: 101-199
- Liability Accounts: 201-299
- Equity Accounts: 301-399
- Revenue Accounts: 401-499
- Expense Accounts: 501-599
The number of accounts listed in your chart of accounts will correlate with your company’s size. For example, the chart of accounts for a small business may include 15 accounts, while a large corporation could have hundreds of different accounts listed.
Assign Category Types
The last column in your chart of accounts should assign a category type to each of the business accounts you listed in the middle column. For example, your business account titled “Equipment” would be labeled as an asset account, and the “Utilities” account would be labeled as an expense account.
Common Account Types
Within the five general types of categories of accounts, assets, liabilities, and equity comprise the balance sheet, or statement of financial position. The other two, revenue and expenses, together amount to the income statement, or statement of financial activity. Below are examples of what types of transactions fit in each account.
Assets are resources that the business has or controls that will create future benefits, such as:
- Accounts receivable
- Long- and short-term investments
Liabilities are obligations that the business owes, things such as:
- Accounts payable
- Short- and long-term debt
- Insurance payable
- Interest payable
This is how much the business owners are owed, or what’s left of assets after a company’s liabilities are paid, such as:
- Retained earnings
- Common, preferred, and treasury stock
- Owner’s capital
- Cash dividends
This is the business’s monetary incoming; for example:
- Revenue from dividends or interest
- Investment earnings
This is the costs of creating business revenue; for instance:
- Depreciation expenses
Making duplicate categories or accidentally filing an expense in the wrong category are common bookkeeping mistakes. You’ll want to keep your chart of accounts as straightforward and organized as possible.
Frequently Asked Questions (FAQs)
How do I edit a chart of accounts in QuickBooks?
If you’re using the accounting software QuickBooks, you won’t typically need to edit or make changes to the chart of accounts, as the program has customized accounts. However, if you do find yourself needing to make changes, QuickBooks provides a step-by-step rundown as well as an instructional video of how to do so.
Why do small businesses need a chart of accounts?
A chart of accounts helps small business owners keep their financial transactions organized, and it provides a snapshot of the company’s financial standing.
Are charts of accounts always listed in the same order?
Charts of accounts use a numbering system to aid with recordkeeping, and are divided into asset, liability, equity, revenue, and expense accounts. They’re organized in the same order as the business’s financial statements, with assets, liabilities, and equity comprising the balance sheet; and revenue and expenses making up the income statement.