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Chart of Accounts

The chart of accounts is a numbered list of all accounts used to record and summarize business transactions. Each account has a unique descriptive title. Although the chart of accounts is considered a complete listing, it changes over time as you add new account numbers. This article explains how the chart of accounts is organized and includes an example of possible account numbering in the chart of accounts.

How the Chart of Accounts is Organized

Your accounting software can be used to set up the chart of accounts. The number of digits used to construct a chart of accounts matches the complexity and organization of the business. In very small businesses, a chart of accounts may be built with a three-digit numbering pattern.  In larger companies, four or more digits may be needed to more accurately capture business data necessary to budget, analyze, and evaluate business performance by department and entity (corporate, division, or subsidiary unit). 

When designing a chart of accounts, be sure that the numbering system will produce desired data for business results tracking. For example:

      •  does the chart of accounts include separate sub-accounts for major product lines or are all products combined in one account? 
      • Are expense accounts identified by the department in sub-accounts, letting you track expenses on a budget vs. actual basis?

The following example and the corresponding Table use four-digit account numbers for the chart of accounts. The first number corresponds to each section of the financial statements. The chart of accounts is numbered in the order of balance sheet accounts, followed by income statement accounts:

1000’s Assets

2000’s Liabilities and Equity

3000’s Revenue

4000’s Cost of Goods Sold

5000’s to 9000’s Expenses, Other Income (Expenses), Gains (Losses), Income Tax Expense, and Other Comprehensive Income

 

The remaining digits are used to create sub-accounts for each type of account. Using sub-account numbers (or account numbers) from the chart of accounts, accountants code debits and credits in a double entry system (using two or more accounts that balance on the debit and credit sides). Accounting systems summarize sub-accounts at each higher level by combining account numbers to create the general ledger. The general ledger is used by the accounting software to prepare financial statements and financial reports. 

 

To number asset accounts using the 1000s range, assign the account number:

            • 1100 to cash, which is further divided into sub-accounts like 1111 for checking account  -  bank name  
              • If your company has more than one checking account, number the first checking account with an identifying description in its title as 1111 
              • Number the second checking account with a different identifying description in its title as 1112
            • 1200 to accounts receivable
  • 1210 for accounts receivable - trade
  • Number the allowance for doubtful accounts, which is an offsetting contra-account as 1220
            • 1300 to prepaid expenses
              • 1310 to prepaid insurance

 

To assign an account numbers to liability and equity accounts use the 2000’s range. For liabilities, assign the account number:

            • 2100 to accounts payable
              • 2110 to accounts payable - trade
            • 2200 to accrued liabilities
            • 2400 to a revolving line of credit
            • 2500s to notes payable - short term portion
            • 2600s to notes payable - long term portion

For equity accounts, assign the account number:

            • 2800 to Equity
              • 2810 to (total) Capital     
                • 2811 to Par value of stock
                • 2812 to Paid-in capital    
                • 2813 to (Less) Treasury stock
            •  If the company does not issue stock, you can set up a Capital account and Draw account instead of in the Equity Section.
              • 2840 to Retained Earnings
                • 2841 to Beginning balance - Retained earnings
                • 2842 to Net income (Loss)
                • 2843 to Gains (Losses)
              • 2860 to Accumulated Other Comprehensive Income (Loss)  (which is a total)
                • 2861 to 2869 to each type of Other Comprehensive Income (Loss)

 

To create income statement accounts in the chart of accounts, use the 3000s through 9000s range of account numbers. Assign the account numbers:

            • 3000s to Revenues
            • 4000s to Cost of Good Sold and Cost of Services
            • 5000s and above to Operating Expenses
            • In the higher ranges up to 9000s to non-operating expenses, gains and losses, income taxes, and other comprehensive income or loss ( when using a four-digit number design for the chart of accounts) 

Chart of Accounts Example - Table   

Account Number Account Description Related to Financial Statement Financial Statement Section Type of Account Code to Account?
1000 Total Assets Balance Sheet Assets Summary No
1100 Cash Balance Sheet Assets Summary No
1110 Cash - checking accounts     Summary No
1111 Checking Account - Bank A     Sub-account Yes
1112 Checking Account - Bank B     Sub-account Yes
1120 Cash - savings accounts     Summary No
1111 Savings Account - Bank A     Sub-account Yes
1200 Accounts receivable Balance Sheet Assets Summary No
1210 Accounts receivable - trade     Sub-account Yes
1220 Allowance for doubtful accounts     Sub-account Yes
           
1300 Inventory Balance Sheet Assets Summary No
1310 Raw materials     Sub-account Yes
1311 Work in progress     Sub-account Yes
1312 Finished goods inventory     Sub-account Yes
           
1400 Prepaid assets Balance Sheet Assets Summary No
1410 Prepaid insurance     Sub-account Yes
           
1500 Intangible assets Balance Sheet Assets Summary No
1510 Patents     Sub-account Yes
1511 Patent costs     Sub-account Yes
1512 Patent amortization     Sub-account Yes
           
1600 Property, plant, and equipment Balance Sheet Assets Summary No
1611 Computer and office equipment     Sub-account Yes
1612 Furniture     Sub-account Yes
1616 Accumulated depreciation - computer and office equipment     Sub-account Yes
1617 Accumulated depreciation - computer and office equipment     Sub-account Yes
           
1900 Other assets Balance Sheet Assets Summary No
1910 Other assets - misc     Sub-account Yes
           
2000 Total Liabilities and Equity Balance Sheet Liabilities and Equity Summary No
2100 Accounts payable   Liabilities Summary No
2110 Accounts payable -trade     Sub-account Yes
2200 Accrued liabilities   Liabilities Summary No
2210 Accrued payroll     Sub-account Yes
2211 Accrued payroll taxes     Sub-account Yes
2212 Accrued benefits     Sub-account Yes
2213 Accrued bonuses     Sub-account Yes
2214 Accrued insurance     Sub-account Yes
2215 Sales taxes payable     Sub-account Yes
2216 Income taxes payable - current     Sub-account Yes
2217 Accrued other liabilities     Sub-account Yes
2220 Unearned revenue (or Deferred revenue)     Sub-account Yes
2230 Income taxes payable - noncurrent     Sub-account Yes
2400 Revolving line of credit   Liabilities Sub-account Yes
2500 Notes payable - short term portion   Liabilities Summary No
2501 Note payable to AD - short-term     Sub-account Yes
2502 Note payable to ZN - short-term     Sub-account Yes
2600 Notes payable - long-term portion   Liabilities Summary No
2601 Note payable to AD - long-term     Sub-account Yes
2602 Note payable to ZN - long-term     Sub-account Yes
2800 Total Equity   Equity Summary No
2810 Total Capital   Equity Summary No
2811 Par Value of Stock   Equity Sub-account Yes
2812 Paid-in Capital   Equity Sub-account Yes
2813 Less: Treasury Stock   Equity Sub-account Yes
2840 Retained Earnings   Equity Summary No
2841 Beginning Balance - Retained Earnings     Sub-account Yes
2842 Net Income (Loss)     Sub-account Yes
2843 Gains (losses)     Sub-account Yes
2860 Accumulated Other Comprehensive Income (Loss)   Equity Summary No
2861 Accumulated unrealized gains (losses) on derivative financial instruments used in hedging     Sub-account Yes
2862 Cumulative translation adjustment (CTA) for foreign currency     Sub-account Yes
2863 Accumulated unrealized gains (losses) from available for sale debt securities investments     Sub-account Yes
3000 Total Revenues Income Statement Revenues Summary No
3100 Total Marine Product Line net Sales Income Statement Revenues Summary No
3110 Snorkeling Masks net Sales Income Statement Revenues Summary No
3111 Snorkeling Masks Sales     Sub-account Yes
3112 Snorkeling Masks - returns & allowances     Sub-account Yes
3120 Diving Fins net sales Income Statement Revenues Summary No
3121 Diving Fins Sales     Sub-account Yes
3122 Diving Fins - returns & allowances     Sub-account Yes
3200 Land Product Line net Sales Income Statement Revenues Sub-account Yes
3210 Hiking Sticks - net sales Income Statement Revenues Summary No
3211 Hiking Sticks Sales     Sub-account Yes
3212 Hiking Sticks - returns & allowances     Sub-account Yes
        Sub-account Yes
4000 Cost of Goods Sold and Services Income Statement Expenses Summary No
4110 Cost of Goods Sold - Marine Product Line Income Statement Expenses Summary No
4111 Cost of Goods Sold - Snorkeling Masks     Sub-account Yes
4112 Cost of Goods Sold - Diving Fins     Sub-account Yes
4210 Cost of Goods Sold - Land Product Line Income Statement Expenses Summary No
4211 Cost of Goods Sold - Hiking Sticks     Sub-account Yes
4020 Cost of Services Income Statement Expenses Sub-account Yes
4030 Fulfillment costs Income Statement Expenses Sub-account Yes
4040 Freight-out Income Statement Expenses Sub-account Yes
           
5000 Operating Expenses Income Statement Expenses Summary No
5100 General and Administrative expenses Income Statement Expenses Sub-account Yes
5101 G&A salaries     Sub-account Yes
5102 G&A bonuses        
5103 G&A contract labor        
5104 G&A office rent - short term     Sub-account Yes
5105 G&A travel expenses - airfare     Sub-account Yes
5106 G&A travel expenses - vehicle rental     Sub-account Yes
5107 G&A travel expenses - meals     Sub-account Yes
5108 G&A office supplies     Sub-account Yes
5109 G&A training expense     Sub-account Yes
5110 G&A maintenance and repair     Sub-account Yes
5111 G&A janitorial services     Sub-account Yes
5112 G&A depreciation expense     Sub-account Yes
5200 Sales and marketing expenses Income Statement Expenses Summary No
5210 Sales expenses Income Statement Expenses Summary No
5211 Sales salaries     Summary No
5212 Sales commissions     Sub-account Yes
5213 Sales bonuses     Sub-account Yes
5214 Sales travel expenses -airfare     Sub-account Yes
5215 Sales travel expenses -vehicle rental     Sub-account Yes
5216 Sales travel expenses - meals     Sub-account Yes
5220 Marketing expenses Income Statement Expenses Summary No
5211 Marketing salaries     Sub-account Yes
5212 Marketing bonuses     Sub-account Yes
5213 Marketing travel -airfare     Sub-account Yes
5214 Marketing travel - vehicle rental     Sub-account Yes
5215 Marketing travel - meals     Sub-account Yes
5216 Marketing materials     Sub-account Yes
5217 Trade show expenses     Sub-account Yes
5218 Advertising expense     Sub-account Yes
5219 Contract labor - marketing     Sub-account Yes
5300 R&D Expenses Income Statement Expenses Summary No
5301 R&D salaries     Summary No
5302 R&D bonuses     Sub-account Yes
5303 R&D supplies     Sub-account Yes
5304 R&D travel - airfare     Sub-account Yes
5305 R&D travel - vehicle rental     Sub-account Yes
5306 R&D travel - meals     Sub-account Yes
5400 Manufacturing department expenses Income Statement Expenses Summary No
5401 Manufacturing salaries and wages     Sub-account Yes
5402 Manufacturing rework     Sub-account Yes
5403 Manufacturing scrap expense     Sub-account Yes
5404 Manufacturing services expense     Sub-account Yes
5405 Manufacturing maintenance and repair     Sub-account Yes
5406 Manufacturing travel - airfare     Sub-account Yes
5407 Manufacturing travel - vehicle rental     Sub-account Yes
5500 Customer service and support expenses     Summary No
5501 Customer service salaries     Sub-account Yes
5502 Customer service bonuses     Sub-account Yes
5503 Customer service training     Sub-account Yes
5504 Customer service supplies     Sub-account Yes
6000 Other Income (Loss) Income Statement Expense or Income Summary No
5601 Interest expense     Sub-account Yes
5602 Interest income     Sub-account Yes
6100 Gains or Losses Income Statement Gains or Losses Summary No
5701 Gain (Loss) from Fixed Asset sales     Sub-account Yes
7000 Net Income Income Statement Net Income (Loss) Summary No
7010 Net Income before Taxes Income Statement Net Income (Loss) Summary No
7011 Income Taxes     Sub-account Yes
8000 Other Comprehensive Income (Loss) Income Statement Other Comprehensive Income (Loss) Summary No
8001 Unrealized gains (losses) on derivative financial instruments used in hedging     Sub-account Yes
8002 Translation adjustment (CTA) for foreign currency     Sub-account Yes
8003 Unrealized gains (losses) from available for sale equity securities investments     Sub-account Yes

 

Takeaway

When designing and constructing your chart of accounts, plan the structure and the accounts and sub-accounts needed by your specific company. Thoughtful planning and implementation will allow you to track and record items related to your business through useful sub-account fields that can be data mined through a drill-down feature, report, or data analytics. You can always add new accounts later or delete those accounts that you will never use. 

With ZarMoney accounting software, you have some flexibility when creating your custom chart of accounts. Your chart of accounts can be efficiently built within the accounting system. 

A well-designed chart of accounts will help you plan, analyze, and control your business results. The account details tell you how your actual results compare to your forecast and budget by line item, allowing you to make decisions and manage your company better.

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