Setting up a chart of accounts

It also includes account type definitions along with examples of the types of transactions or subaccounts each may include. The asset ledger is the portion of a company’s accounting records that detail the journal entries relating only to the asset section of the balance sheet. Assets represent resources with economic value anticipated to deliver future value to the organization. The balance sheet provides an overview of assets,
liabilities, and stockholders’ equity at a specific point
in time.

If you’ve identified redundant or archaic accounts, it can be tempting to clean it up by deleting or by merging them. It’s a good rule of thumb to look at your system at the end of every fiscal year and ask yourself whether any accounts can be consolidated or removed. Note that the more accounts you add, the more likely you are to run out of numbers in each of the parent categories, and it can be difficult to go back and slot new numbers in. The double-entry system displays two columns for these entries, called debits and credits. This allows you to track money coming into your business and money going out of it.

3 Copying the Chart of Accounts

You can then nest similar accounts under broader categories within each of these ranges. For example, Meals Expense might be a standalone account or it might be spread across the categories the meals relate to, such as Marketing, Conferences, or Travel. For example, if depreciation is $50 per month and sales are $500 per month, depreciation is 10% of sales.

The house would end up very different from the dream, and not be very functional. That doesn’t mean recording every single detail about every single transaction. You don’t need a separate how to set up a chart of accounts account for every product you sell, and you don’t need a separate account for each utility. Our partners cannot pay us to guarantee favorable reviews of their products or services.

Why is Chart of Accounts Important?

Charts of accounts use a numbering system to aid with recordkeeping, and are divided into asset, liability, equity, revenue, and expense accounts. A chart of accounts keeps your accounts organized based on how they appear on your balance sheet and income statement. It includes the asset accounts your company owns, the liabilities your company owes others, equity accounts, revenue accounts, and expense accounts.

Companies use a COA to organize their finances and give interested parties, such as investors and shareholders, a clear view and understanding of their financial health. Separating expenditures, revenue, assets, and liabilities helps to achieve this and ensures that financial statements are in compliance with reporting standards. 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. A chart of accounts is arranged with a numbering system to help keep the recordkeeping process more organized.

What is the purpose of a chart of accounts?

Here the links show examples using a construction company as the business example. To make your Chart of Accounts more organized, you should assign https://personal-accounting.org/how-to-setup-your-chart-of-accounts/ account numbers to each of your accounts. This helps to create a consistent numbering system and makes it easier to locate specific accounts.

We believe everyone should be able to make financial decisions with confidence. These sample charts will give you an idea of the different accounts you’ll set up and the system for adding new account numbers. Whether you’re setting up from scratch or not, we recommend you review
the topics listed below. They will familiarize you with some of the choices
you need to make and the data you should collect before proceeding.

Setting up Subaccounts for your Real Estate — Fixed Assets

But be careful, your hierarchy will do more harm than good if you let it get out of control. To keep the chart of accounts in check, limit your hierarchy to no more than four levels, and make sure your accounts are grouped appropriately – see next paragraph. The below table shows an example of this chart of accounts hierarchy using the revenue and COGS accounts discussed above. Even if you’re business is pretty simple with just a few employees, there will be a lot of different categories you will use, and these can get confusing.