The chart of accounts is a listing of all the accounts in the general ledger, each account 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 business. Each account should have a number to identify it. For very small businesses, three digits may suffice for the account number, though more digits are highly desirable in order to allow for new accounts to be added as the business grows. With more digits, new accounts can be added while maintaining the logical order. Complex businesses may have thousands of accounts and require longer account reference numbers. It is worthwhile to put thought into assigning the account numbers in a logical way, and to follow any specific industry standards. An example of how the digits might be coded is shown in this list:
Account Numbering
1000 - 1999: asset accounts
2000 - 2999: liability accounts
3000 - 3999: equity accounts
4000 - 4999: revenue accounts
5000 - 5999: cost of goods sold
6000 - 6999: expense accounts
7000 - 7999: other revenue (for example, interest income)
8000 - 8999: other expense (for example, income taxes)
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. For example, to report the cost of goods sold a manufacturing business will have accounts for its various manufacturing costs whereas a retailer will have accounts for the purchase of its stock merchandise. Many industry associations publish recommended charts of accounts for their respective industries in order to establish a consistent standard of comparison among firms in their industry. 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 more 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 organizing the chart of accounts with a higher initial level of detail.
Some accounts must be included due to tax reporting requirements. For example, in the U.S. the IRS requires that travel, entertainment, advertising, and several other expenses be tracked in individual accounts. One should check the appropriate tax regulations and generate a complete list of such required accounts.
Other accounts should be set up according to vendor. If the business has more than one checking account, for example, the chart of accounts might include an account for each of them.
Account Order
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. For example, sales would be listed before non-operating income. In some cases, part or all of the expense accounts simply are listed in alphabetical order.
Sample Chart of Accounts
The following is an example of some of the accounts that might be included in a chart of accounts.
Sample Chart of Accounts
Asset Accounts
Current Assets
1000 |
Petty Cash |
| 1010 | Cash on Hand (e.g. in cash registers) |
| 1020 | Regular Checking Account |
| 1030 | Payroll Checking Account |
| 1040 | Savings Account |
| 1050 | Special Account |
| 1060 | Investments - Money Market |
| 1070 | Investments - Certificates of Deposit |
| 1100 | Accounts Receivable |
| 1140 | Other Receivables |
| 1150 | Allowance for Doubtful Accounts |
| 1200 | Raw Materials Inventory |
| 1205 | Supplies Inventory |
| 1210 | Work in Progress Inventory |
| 1215 | Finished Goods Inventory - Product #1 |
| 1220 | Finished Goods Inventory - Product #2 |
| 1230 | Finished Goods Inventory - Product #3 |
| 1400 | Prepaid Expenses |
| 1410 | Employee Advances |
| 1420 | Notes Receivable - Current |
| 1430 | Prepaid Interest |
| 1470 | Other Current Assets |
Fixed Assets
1500 |
Furniture and Fixtures |
| 1510 | Equipment |
| 1520 | Vehicles |
| 1530 | Other Depreciable Property |
| 1540 | Leasehold Improvements |
| 1550 | Buildings |
| 1560 | Building Improvements |
| 1690 | Land |
| 1700 | Accumulated Depreciation, Furniture and Fixtures |
| 1710 | Accumulated Depreciation, Equipment |
| 1720 | Accumulated Depreciation, Vehicles |
| 1730 | Accumulated Depreciation, Other |
| 1740 | Accumulated Depreciation, Leasehold |
| 1750 | Accumulated Depreciation, Buildings |
| 1760 | Accumulated Depreciation, Building Improvements |
Other Assets
1900 |
Deposits |
| 1910 | Organization Costs |
| 1915 | Accumulated Amortization, Organization Costs |
| 1920 | Notes Receivable, Non-current |
| 1990 | Other Non-current Assets |
Liability Accounts
Current Liabilities
2000 |
Accounts Payable |
| 2300 | Accrued Expenses |
| 2310 | Sales Tax Payable |
| 2320 | Wages Payable |
| 2330 | 401-K Deductions Payable |
| 2335 | Health Insurance Payable |
| 2340 | Federal Payroll Taxes Payable |
| 2350 | FUTA Tax Payable |
| 2360 | State Payroll Taxes Payable |
| 2370 | SUTA Payable |
| 2380 | Local Payroll Taxes Payable |
| 2390 | Income Taxes Payable |
| 2400 | Other Taxes Payable |
| 2410 | Employee Benefits Payable |
| 2420 | Current Portion of Long-term Debt |
| 2440 | Deposits from Customers |
| 2480 | Other Current Liabilities |
Long-term Liabilities
2700 |
Notes Payable |
| 2702 | Land Payable |
| 2704 | Equipment Payable |
| 2706 | Vehicles Payable |
| 2708 | Bank Loans Payable |
| 2710 | Deferred Revenue |
| 2740 | Other Long-term Liabilities |
Equity Accounts
3010 |
Stated Capital |
| 3020 | Capital Surplus |
| 3030 | Retained Earnings |
Revenue Accounts
4000 |
Product #1 Sales |
| 4020 | Product #2 Sales |
| 4040 | Product #3 Sales |
| 4060 | Interest Income |
| 4080 | Other Income |
| 4540 | Finance Charge Income |
| 4550 | Shipping Charges Reimbursed |
| 4800 | Sales Returns and Allowances |
| 4900 | Sales Discounts |
Cost of Goods Sold
5000 |
Product #1 Cost |
| 5010 | Product #2 Cost |
| 5020 | Product #3 Cost |
| 5050 | Raw Material Purchases |
| 5100 | Direct Labor Costs |
| 5150 | Indirect Labor Costs |
| 5200 | Heat and Power |
| 5250 | Commissions |
| 5300 | Miscellaneous Factory Costs |
| 5700 | Cost of Goods Sold, Salaries and Wages |
| 5730 | Cost of Goods Sold, Contract Labor |
| 5750 | Cost of Goods Sold, Freight |
| 5800 | Cost of Goods Sold, Other |
| 5850 | Inventory Adjustments |
| 5900 | Purchase Returns and Allowances |
| 5950 | Purchase Discounts |
Expenses
6000 |
Default Purchase Expense |
| 6010 | Advertising Expense |
| 6050 | Amortization Expense |
| 6100 | Auto Expenses |
| 6150 | Bad Debt Expense |
| 6200 | Bank Fees |
| 6250 | Cash Over and Short |
| 6300 | Charitable Contributions Expense |
| 6350 | Commissions and Fees Expense |
| 6400 | Depreciation Expense |
| 6450 | Dues and Subscriptions Expense |
| 6500 | Employee Benefit Expense, Health Insurance |
| 6510 | Employee Benefit Expense, Pension Plans |
| 6520 | Employee Benefit Expense, Profit Sharing Plan |
| 6530 | Employee Benefit Expense, Other |
| 6550 | Freight Expense |
| 6600 | Gifts Expense |
| 6650 | Income Tax Expense, Federal |
| 6660 | Income Tax Expense, State |
| 6670 | Income Tax Expense, Local |
| 6700 | Insurance Expense, Product Liability |
| 6710 | Insurance Expense, Vehicle |
| 6750 | Interest Expense |
| 6800 | Laundry and Dry Cleaning Expense |
| 6850 | Legal and Professional Expense |
| 6900 | Licenses Expense |
| 6950 | Loss on NSF Checks |
| 7000 | Maintenance Expense |
| 7050 | Meals and Entertainment Expense |
| 7100 | Office Expense |
| 7200 | Payroll Tax Expense |
| 7250 | Penalties and Fines Expense |
| 7300 | Other Taxes |
| 7350 | Postage Expense |
| 7400 | Rent or Lease Expense |
| 7450 | Repair and Maintenance Expense, Office |
| 7460 | Repair and Maintenance Expense, Vehicle |
| 7550 | Supplies Expense, Office |
| 7600 | Telephone Expense |
| 7620 | Training Expense |
| 7650 | Travel Expense |
| 7700 | Salaries Expense, Officers |
| 7750 | Wages Expense |
| 7800 | Utilities Expense |
| 8900 | Other Expense |
| 9000 | Gain/Loss on Sale of Assets |
