6.11 Chart of Accounts

15 May 2009


The chart of accounts is a listing of all the accounts in the general ledger, each account is accompanied by a reference number. To set up a chart of accounts, one first needs to define the various accounts to be used by the organisation. Each account should have a number to identify it. It is worthwhile to put thought into assigning the account numbers in a logical way. An example of how the digits might be coded is shown in this list:

 

 

Account Numbering

  • 1000 - 1499: current assets
  • 1500 - 1999: fixed assets
  • 2000 - 2499: current liabilities
  • 2500 - 2999: long term liabilities
  • 3000 - 3999: equity accounts
  • 4000 - 4999: Revenue accounts
  • 5000 - 5999: cost of goods sold
  • 6000 - 9999: expense accounts


By separating each account by several numbers, many new accounts can be added between any two while maintaining the logical order.

 

 

Defining Accounts

Different types of businesses will have different accounts. Accounting software packages often come with a selection of predefined account charts for various types of businesses.

There is a trade-off between simplicity and the ability to make historical comparisons. Initially keeping the number of accounts to a minimum has the advantage of making the accounting system simple. Starting with a small number of accounts, as certain accounts acquired significant balances they would be split into smaller, more specific accounts. However, following this strategy makes it more difficult to generate consistent historical comparisons. For example, if the accounting system is set up with a miscellaneous expense account that later is broken into several detailed accounts, it then would be difficult to compare those detailed expenses with past expenses of the same type. In this respect, there is an advantage in organising the chart of accounts with a higher initial level of detail.

Balance sheet accounts tend to follow a standard that lists the most liquid assets first. Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business.

See Appendix 8 for a Sample Chart of Accounts.