Understand Chart Of Accounts Before You Regret.
Before we dive in, let me introduce you to chart of accounts;
As we all know, a business undergoes many business transactions throughout the year.
These Transactionsmay relate to sales, expenses or obligations etc.
If thesetransactions are not recorded in their respective category, you may face theproblems like;
- Extracting statement of profit or loss andbalance sheet will be difficult
- It may be difficult for you to calculate yourtax. This may lead you to serious troubles. Then, you’ll have to hire someoneto do all this.
Therefore, Sacred Accounting recommends you to categories transactions and record them in their respective category. This is what we call “Setting up Chart of Accounts”.
What is a Chart of Accounts?
The simplest definition of chart of accounts is
“A list of accounts created by a business to be used to record transactions into categories like assets, liabilities, expenses and incomes”.
But thesefour categories of transaction are very broad. We must break them down to subaccounts called “General Ledger”. Each General Ledger falls into one of thefour categories I.e. assets, liabilities, expenses and incomes.
ThisGeneral Ledger is identified by;
Unique Code(chart of accounts numbering) and
Generally, a company have the freedom to use its own chart of accounts as long it stays within the rules of accounting. However, in some countries, Government might force business to follow a Generic chart of accounts issued by the government.
The mainpurpose of Chart of Accounts is to make sure that all transactions arecategorized in accordance with the needs and requirements of business.
Let mesuppose, a business is in the process of creation of chart of accounts.
It may comeup with a code range for line items of financial statements such as;
|Line Item of Financial Statements||Code Range|
For each of these line items of financial statements, the business might have several sub-accounts. We will be breaking these line items of financial statements into sub-accounts or General Ledgers to get a complete list of chart of accounts.
Chart ofAccounts for Non-Current Assets
Usually,assets with a useful life more than one year are commonly called as non-currentassets.
Followings are some possible list of accounts for non-current assets;
You cansee, as our code range for non-current assets was 1001-10050, so all the abovenon-currents are falling in that range. This is because the above assets arethe sub items of our main account “Non-Current Assets”.
For Current Assets
Usually,Assets with a useful life less than one year are called current assets.
Followings isan example of list of accounts for current assets.
|Debtors or Accounts Receivables||1055|
|Prepayments or Prepaid Assets||1061|
|Differed Tax Asset||1076|
|Cash & Bank||1089|
As ourCurrent Assets Code range was 1051-1100, therefore all of the above currentassets are falling in this range.
Chart ofAccounts for Non-Current Liabilities
Non-currents liabilities are liabilities or obligations for more than one year.
Some of thelist of accounts for non-current liabilities are given below;
|Long term Loan||1104|
|Long term Lease Liabilities||1119|
|Long term Bonds Payables||1127|
I guess,this time I don’t need to tell you that as our code range for non-current liabilitieswas 1101-1150, so all the above non-current liabilities have their code in thatrange. That’s validating my initial point that a chart of account is identifiedby a unique code and heading.
Sample Chart of Accounts for Current Liabilities
Liabilitiesor obligations for less than one year are called current liabilities.
Some examplesof current liabilities are;
|Account Payables or Creditors||1165|
|Differed Tax Liability||1173|
All the above ledger accounts are falling under code range 1151-1200 that we used for Current Liabilities in our example.
Incomes or revenues may have Sales or any other chart of accounts. Like we assigned unique codes to list of accounts falling under non-current and current assets and liabilities, we can assign codes to chart of accounts falling under incomes also.
Chart ofAccounts for Expenses
We can assign unique codes to accounts falling under expenses in the code range 1251-1300. Following is the sample list of expenses in accounting with their account codes;
Chart ofAccounts for Equity/Owner’s Capital:
In case of sole proprietorship, owner might be a single person, whilst if the entity is a private Ltd. Company, owner may be from 1 to 50, but it depends on the regulations in the respective country. Whilst, a public company have many owner’s or shareholders. I Assume that, you are looking for chart of accounts for a small business, where you are the sole owner, in that case list of accounts list for Equity can be;
- Chart of Accounts is a list of Accounts.
- Each list of Accounts has its own name and a unique code.
- You can set them as you wish, with codes of your choice, you just need to make sure that you remain within the limits set by Generally Accepted Accounting Principles or GAAP.
- Setting up chart of Accounts for your business can make your life simpler. It will be easy to extract Financial Statements at the end of the financial year.
- You may hire an accountant like a cpa or chartered accountant to do this. Otherwise, you can use bookkeeping software like QuickBooks, Xero, Waves, Excel etc. They are not that much difficult to use.
How useful was this post?
Click on a star to rate it!
Average rating / 5. Vote count:
No votes so far! Be the first to rate this post.
We are sorry that this post was not useful for you!
Let us improve this post!
Thanks for your feedback!