Chart of Accounts
An essential part of double-entry bookkeeping is ensuring that you are recording the transaction in the correct account. But how do you know which account to record it in? The chart of accounts will help you!
What is the Chart of Accounts?
The chart of accounts is a list of all the financial accounts used in your business. Accounts vary based on industry, size, and your personal needs. To start, you should create accounts based on the balance sheet and income statement. Using these accounts will help you prepare financial statements and stay in compliance with financial reporting standards.
The Balance Sheet Accounts
The balance sheet is based on the accounting equation: assets = liabilities + owners’ equity. Within each of these accounts, there are more specific sub-accounts organized by business function and transaction. Here are some examples of common accounts:
The Income Statement Accounts
The other financial statement included in the chart of accounts is the income (P&L) statement, which includes revenue and expenses. Just like the balance sheet, these accounts are broken down further into sub-accounts. Operating revenue includes money you make from sales while operating expenses includes:
Cost of Goods Sold (COGS)
Depending on the complexity and size of your business, you may have more accounts than you can keep track of. So, how do you organize them? Using reference numbers can help you find and record your transactions. There is no required way to code your accounts, however, a common practice is to have the first number identify the financial statement account while the following numbers represent sub-accounts like shown below:
100-199 – Assets
200-299 – Liabilities
300-399 – Owners' Equity
400-499 – Operating Revenue
500-599 – Operating expenses
For example, the cash account (an asset), may have the reference number 101. If you use a digital bookkeeping software like QuickBooks, reference numbers will be assigned automatically.
Adjusting Chart of Accounts
A general rule of thumb when adjusting the chart of accounts is that you can add a new account when needed, but you shouldn’t delete any accounts until the end of the year. This prevents accidentally deleting information needed in balancing your books.
When adding a new account, you should look back at your past entries and see if there are any that fall into the new account. If there is, then you will need to make an adjusting journal entry to move the transaction into the correct account.
The chart of accounts allows you to record and track all your business transactions in a way that’s easy to navigate. It gives you the tools to produce financial statements, stay in compliance with financial reporting standards, and make better financial decisions.
If you’re looking for a professional to help you track and record your transactions, our team of bookkeepers are happy to help! Contact us or give us a call at (360)756-5020 and we’ll take care of the numbers while you focus on your business!