Chart of Accounts Example

A chart of accounts is an important part of the accounting system and serves as a base for preparing accounts. It basically tells which account to use for recording the transactions into the journal. The chart of accounts lists all the accounts that a company uses in the accounting system. It does not include any other information about the accounts, including their balances, debits, and credits. For more understanding, refer to the chart of accounts example below;

Chart of Accounts Example

Below is the chart of accounts example. It is for ABC Electronic Repair Services

Number                   Account DescriptionAccount TypeStatement
1000CashAssetsBalance Sheet
1010Accounts ReceivableAssetsBalance Sheet
1011Allowance for Doubtful AccountsAssetsBalance Sheet
1020Notes ReceivableAssetsBalance Sheet
1030Interest ReceivableAssetsBalance Sheet
1040Service SuppliesAssetsBalance Sheet
1510Leasehold ImprovementsAssetsBalance Sheet
1520Furniture and FixturesAssetsBalance Sheet
1521Accumulated Depreciation (Furniture/Fixtures)AssetsBalance Sheet
1530Service EquipmentAssetsBalance Sheet
1531Accumulated Depreciation – Service EquipmentAssetsBalance Sheet
2000Accounts PayableLiabilitiesBalance Sheet
2010Notes PayableLiabilitiesBalance Sheet
2020Salaries PayableLiabilitiesBalance Sheet
2030Rent Payable for Repair ShopLiabilitiesBalance Sheet
2040Interest PayableLiabilitiesBalance Sheet
2050Unearned RevenueLiabilitiesBalance Sheet
2060Loans PayableLiabilitiesBalance Sheet
3000CapitalOwner’s EquityBalance Sheet
3010DrawingOwner’s EquityBalance Sheet
4000Service RevenueRevenueIncome Statement
4010Interest IncomeRevenueIncome Statement
4020Gain on Sale of Repair EquipmentRevenueIncome Statement
4999Income SummaryRevenueIncome Statement
5000Rent ExpenseExpensesIncome Statement
5010Salaries ExpenseExpensesIncome Statement
5020Repair Supplies ExpenseExpensesIncome Statement
5030Utility ExpenseExpensesIncome Statement
5040Interest ExpenseExpensesIncome Statement
5050Taxes and LicensesExpensesIncome Statement
5060Depreciation ExpenseExpensesIncome Statement
5070Doubtful Accounts ExpenseExpensesIncome Statement
Chart of Accounts

How to Edit Chart of Accounts

In the future, if there is a new account, ABC company can adjust it between the same range of numbers. Usually, a company sets a range of numbers for a particular account type. In the above case, ABC has set numbers 1000-1999 for assets, 2000-2999 for liabilities, 3000-3999 for owner’s equity, 4000-4999 for revenues, and 5000-5999 for expenses.

For instance, if there is a new asset account for prepaid insurance. The company can list it as 1610 or any other number between 1000-1999 that has not been taken. If the numbers are taken, then the company can give it a sub-number, such as 1600 -1.

A proper way to edit the chart of accounts is that you can add any new account at any time during the year. But, to delete an old account, it is better to wait until the end of the year. Deleting an account in the middle of the year may lead to errors.

Suppose a debtor declared bankruptcy sometime during the middle of the year, and thus, you don’t expect to get any money from him. So, you decide to remove this debtor from the chart of accounts. However, before the end of the year, the bank that was handling the bankruptcy makes you a part payment on the debtor’s behalf with an assurance of more payment going ahead. Now, you will have to make the debtor’s account again. On the other hand, if you had waited until the end of the year, you wouldn’t have to make any extra charges.

Best Practices

A company can improve the chart of accounts by following the below points;

Consistency –  one must try to create a chart of accounts that would not change for a few years at least. This allows the company to compare the results over a multi-year period.

Numbering – avoid concurrent numbers for your accounts because you may have to add more accounts in the future. If you don’t make provisions for future accounts now, you may not be able to add new accounts in the correct order. (Read more about Charts of Accounts Numbering).

Lockdown – if a company has subsidiaries, then it should make them follow the same pattern for the chart of accounts. This makes it easier to consolidate the results of all companies.

Periodical Review – it is important that a company reviews the chart of accounts from time to time. This will allow the company to weed out unused accounts and consolidate duplicate accounts. Such a periodical review helps the company keep a check on the number of accounts.

Final Words

A point to note is that the chart of accounts of one company may not be suitable for another company. Different companies may have different-looking charts of accounts. For instance, an automobile company’s chart of accounts will have many references to the “auto parts.” It won’t be wrong to say that the chart of accounts should be such that it gives an outsider a rough idea of the nature of the business.

Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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