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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 Transactions may relate to sales, expenses or obligations etc.

If these transactions are not recorded in their respective category, you may face the problems like;

  • Extracting statement of profit or loss and balance sheet will be difficult
  • It may be difficult for you to calculate your tax. This may lead you to serious troubles. Then, you’ll have to hire someone to 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 these four categories of transaction are very broad. We must break them down to sub accounts called “General Ledger”. Each General Ledger falls into one of the four categories I.e. assets, liabilities, expenses and incomes.

This General Ledger is identified by;

Unique Code (chart of accounts numbering) and

A heading.

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.

Purpose

The main purpose of Chart of Accounts is to make sure that all transactions are categorized in accordance with the needs and requirements of business.

Examples

Let me suppose, a business is in the process of creation of chart of accounts.

It may come up with a code range for line items of financial statements such as;

Line Item of Financial Statements Code Range
Non-Current Assets 1001-1050
Current Assets 1051-1100
Non-Current Liabilities 1101-1150
Current Liabilities 1151-1200
Equity 1201-1250
Expenses 1251-1300
Incomes 1301-1350

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 of Accounts for Non-Current Assets

Usually, assets with a useful life more than one year are commonly called as non-current assets.

Followings are some possible list of accounts for non-current assets;

Non-Current Asset Code
Land 1009
Factory 10015
Office Building 10020
Plants 10040

You can see, as our code range for non-current assets was 1001-10050, so all the above non-currents are falling in that range. This is because the above assets are the 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 is an example of list of accounts for current assets.

Current Assets Code
Debtors or Accounts Receivables 1055
Prepayments or Prepaid Assets 1061
Differed Tax Asset 1076
Cash & Bank 1089

As our Current Assets Code range was 1051-1100, therefore all of the above current assets are falling in this range.

Chart of Accounts for Non-Current Liabilities

Non-currents liabilities are liabilities or obligations for more than one year.

Some of the list of accounts for non-current liabilities are given below;

Non-Current Liabilities Code
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 liabilities was 1101-1150, so all the above non-current liabilities have their code in that range. That’s validating my initial point that a chart of account is identified by a unique code and heading.

Sample Chart of Accounts for Current Liabilities

Liabilities or obligations for less than one year are called current liabilities.

Some examples of current liabilities are;

Current Liabilities Code
Account Payables or Creditors 1165
Differed Tax Liability 1173
Interest Payable 1197

All the above ledger accounts are falling under code range 1151-1200 that we used for Current Liabilities in our example.

For Incomes

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 of Accounts 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;

Expenses Code
Purchases 1266
Depreciation 1275
Rent 1290
Payroll 1293
Delivery Charges 1298
Accounts payable is a chart of accounts for expenses in Accounting.
Accounts Payable- Chart of Accounts for Expenses

Chart of Accounts 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;

Equity Code
Capital 1208
Drawings 1219

Conclusions

  • 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.

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