4. Chart of Accounts - The Basics

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Chart of Accounts - The Basics Posted in 3. Chart of Accounts by Erin Lawlor on the August 29th, 2008

<< Double Entry Accounting - Practice >> Chart of Accounts - Organization

This post begins the explanation of the Chart of Accounts. The Chart of Accounts is part of the second basic function of the Double Entry Accounting System - to organize financial transaction data. The Chart of Accounts provides the organizational structure for another element, the General Ledger which summarizes the Financial Data and produces Financial Reports.

The purpose of this and the next two posts (4-6) is to introduce the organizational structure of the system and for that reason, I do not make a distinction between the Chart of Accounts and the General Ledger until Post # 7.

Review of the Double Entry Accounting Transaction Questions:

  1. How much money changed hands?
  2. Where did the money go?  What was either gained or paid for by this exchange?
  3. Where did the money come from?  What is the source of the value in this exchange?

The Chart of Accounts is basically a list of the descriptions used to answer Transaction Questions 2 and 3. Each unique description is called an account. One of the best features of the Chart of Accounts is that when you have a new type of transaction you can just add a new description (account).

From the transactions in the previous posts, we have started a Chart of Accounts

   * Rent
   * Checking Account
   * Office Supplies
   * Fuel
   * Repairs & Maintenance
   * Subscriptions
   * Accounts Payable (Credit Card)
   * Accounts Receivable
   * Sales

Let’s review the previous entries and create some additional entries to our transaction example and see how our Chart of Accounts starts to fill out.

The entries below the *******’s are new in this post and record:

   * the receipt of payment for the existing Accounts Receivable Invoice
   * the payment of the existing credit card balance
   * a utilities expense and payment
   * new credit card charges

Description Debit Credit

Rent $3,000 Checking Account $3,000

Office Supplies $300 Fuel $275 Repairs and Maintenance $500 Subscriptions $125 Printer $1,300 Accounts Payable (Credit Card) $2,500

Accounts Receivable $50,000 Sales $50,000

• • • • • • • • • • • • • • • • • • • • • • • • • • ********* *********

Checking Account $50,000 Accounts Receivable $50,000

Accounts Payable (Credit Card) $2,500 Checking Account $2,500

Utilities $150 Checking Account $150

Chair $750 Desk $900 Credit Card Interest and Fees $50 Accounts Payable (Credit Card) $1,700

Totals: $109,850 $109,850

Current Chart of Accounts:

   * Rent
   * Checking Account
   * Office Supplies
   * Fuel
   * Repairs & Maintenance
   * Subscriptions
   * Printer
   * Accounts Payable (Credit Card)
   * Accounts Receivable
   * Sales
   * Utilities
   * Chair
   * Desk
   * Credit Card Interest and Fees

To keep the Chart of Accounts manageable and meaningful, it is important to strike a balance between having a long specific list and a short general list. To accomplish this objective, the Chart of Accounts should have descriptions for types of things, and not for specific things. You want the Accounts to be specific enough to be useful but not too specific because the fewer accounts you have the better overall picture you can have.

You wouldn’t add a new account for paper, pens and staples, you would just use one account called office supplies. So, it is important to reuse accounts when possible, and to simplify entries into more general descriptions like “office furniture” instead of separating the chair and desk purchases.

So, now let’s look at the Chart of Accounts and its Account Balances.

Account Balances Debit Credit Checking Account $44,350 Accounts Receivable $0 Office Equipment (Printer) $1,300 Office Furniture $1,650 Accounts Payable $1,700 Sales $50,000 Rent $3,000 Utilities $150 Office Supplies $300 Subscriptions $125 Fuel $275 Repairs and Maintenance $500 Credit Card Interest and Fees $50

Totals $51,700 $51,700

You can see that for even the small number of transactions in this example, The Chart of Accounts is essential in understanding their financial impact.

Notice that the account balances are also separated into the debit/credit columns. The amounts listed here are the difference between the total debit entries and the total credit entries for each account. If the amount was higher on the credit side, then the balance is listed in the credit column. It is also important to note that our Chart of Account balances meet the requirement that total debits equal total credits.

The Chart of Accounts is really comprised of three things for each Account - an Account Number, a Description and an Accounting Type. The transactions and account balances are part of a ledger called the General Ledger. The table above is more accurately described as the General Ledger.

• • Important Note: Post #6 discusses debit and credit balances in accounts. In this case, none of the balances in our accounts is cause for concern because their totals are in the correct column for their type. Accounting Types are explained in more detail in Posts #5 and #6. Post #7 begins the discussion of the General Ledger and its Balances and Reports.

© 2008 - 2010 Erin Lawlor

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• • disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.