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 Description | Account Type | Statement |
| 1000 | Cash | Assets | Balance Sheet |
| 1010 | Accounts Receivable | Assets | Balance Sheet |
| 1011 | Allowance for Doubtful Accounts | Assets | Balance Sheet |
| 1020 | Notes Receivable | Assets | Balance Sheet |
| 1030 | Interest Receivable | Assets | Balance Sheet |
| 1040 | Service Supplies | Assets | Balance Sheet |
| 1510 | Leasehold Improvements | Assets | Balance Sheet |
| 1520 | Furniture and Fixtures | Assets | Balance Sheet |
| 1521 | Accumulated Depreciation (Furniture/Fixtures) | Assets | Balance Sheet |
| 1530 | Service Equipment | Assets | Balance Sheet |
| 1531 | Accumulated Depreciation – Service Equipment | Assets | Balance Sheet |
| 2000 | Accounts Payable | Liabilities | Balance Sheet |
| 2010 | Notes Payable | Liabilities | Balance Sheet |
| 2020 | Salaries Payable | Liabilities | Balance Sheet |
| 2030 | Rent Payable for Repair Shop | Liabilities | Balance Sheet |
| 2040 | Interest Payable | Liabilities | Balance Sheet |
| 2050 | Unearned Revenue | Liabilities | Balance Sheet |
| 2060 | Loans Payable | Liabilities | Balance Sheet |
| 3000 | Capital | Owner’s Equity | Balance Sheet |
| 3010 | Drawing | Owner’s Equity | Balance Sheet |
| 4000 | Service Revenue | Revenue | Income Statement |
| 4010 | Interest Income | Revenue | Income Statement |
| 4020 | Gain on Sale of Repair Equipment | Revenue | Income Statement |
| 4999 | Income Summary | Revenue | Income Statement |
| 5000 | Rent Expense | Expenses | Income Statement |
| 5010 | Salaries Expense | Expenses | Income Statement |
| 5020 | Repair Supplies Expense | Expenses | Income Statement |
| 5030 | Utility Expense | Expenses | Income Statement |
| 5040 | Interest Expense | Expenses | Income Statement |
| 5050 | Taxes and Licenses | Expenses | Income Statement |
| 5060 | Depreciation Expense | Expenses | Income Statement |
| 5070 | Doubtful Accounts Expense | Expenses | Income Statement |
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.
