How to Set Up a Chart of Accounts for Bookkeeping
There’s no secret to knowing how to set up a Chart of Accounts for your business — just make a list of the accounts that apply to your business. Don’t panic if you can’t think of every type of account you may need for your business. It’s very easy to add to the Chart of Accounts at any time.
When you add accounts to a Chart of Accounts, remember to distribute the revised list to any employees that use this list for recording transactions into the bookkeeping system. Employees not directly involved in bookkeeping will need a copy of the Chart of Accounts if they code invoices or other transactions and need to indicate to which account those transactions should be recorded.
The Chart of Accounts usually includes at least three columns:
Account: Lists the account names.
Type: Lists the type of account — asset, liability, equity, income, cost of goods sold, or expense.
Description: Contains a description of the type of transaction that should be recorded in the account.
Many companies also assign numbers to the accounts, to be used for coding charges. If your company is using a computerized system, the computer automatically assigns the account number. Otherwise, you need to plan out your own numbering system.
The most common number system is:
Asset accounts: 1,000 to 1,999
Liability accounts: 2,000 to 2,999
Equity accounts: 3,000 to 3,999
Sales and Cost of Goods Sold accounts: 4,000 to 4,999
Expense accounts: 5,000 to 6,999
This numbering system matches the one used by computerized accounting systems, making it easy for a company to transition if at some future time it decides to automate its books using a computerized accounting system.
If you’re setting up your Chart of Accounts manually, be sure to leave a lot of room between accounts to add new accounts. For example, number your Cash in Checking account 1,000 and your Accounts Receivable account 1,100. That leaves you plenty of room to add other accounts to track cash.
The sample Chart of Accounts, shown, was developed using QuickBooks. You can see a few accounts that are unique to the business, such as Cooking Supplies, and other accounts that are common only to retail business, such as Cash Discrepancies and Merchant Fees.