Tracking Income Statement Accounts for a Chart of Accounts - dummies

Tracking Income Statement Accounts for a Chart of Accounts

The income statement portion of a Chart of Accounts includes revenue and expense accounts. The income statement shows how much money a business generated from sales and how much money it spent to generate those sales. The bottom line of an income statement shows whether a business made a profit or a loss for a specified period of time.

The income statement is made up of two types of accounts (detailed in the following sections):

  • Revenue: These accounts track all money coming into the business, including sales, interest earned on savings, and any other methods used to generate income.

  • Expenses: These accounts track all money that a business spends in order to keep itself afloat.

Recording the money you make

First up in the income statement portion of the Chart of Accounts are accounts that track revenue coming into the business. The most common income accounts are:

  • Sales of Goods or Services: This account, which appears at the top of every income statement, tracks all the money that the company earns selling its products, services, or both.

  • Sales Discounts: Because most businesses offer discounts to encourage sales, this account tracks any reductions to the full price of merchandise.

  • Sales Returns: This account tracks transactions related to returns, when a customer returns a product because he or she is unhappy with it for some reason.

Because not all income is generated by sales of products or services, other income accounts that may appear on a Chart of Accounts include:

  • Other Income: If a company takes in income from a source other than its primary business activity, that income is recorded in this account. For example, a company that encourages recycling and earns income from the items recycled records that income in this account.

  • Interest Income: This account tracks any income earned by collecting interest on a company’s savings accounts. If the company loans money to employees or to another company and earns interest on that money, that interest is recorded in this account as well.

  • Sale of Fixed Assets: Any time a company sells a fixed asset, such as a car or furniture, any revenue made from the sale is recorded in this account. A company should only record revenue remaining after subtracting the accumulated depreciation from the original asset cost.

Tracking the cost of sales

Of course, before you can sell a product, you must spend some money to either buy or make that product. The type of account used to track the money spent is called a Cost of Goods Sold account. The most common Cost of Goods Sold accounts are:

  • Purchases: This account tracks the purchases of all items you plan to sell.

  • Purchase Discount: This account tracks the discounts you may receive from vendors if you pay for your purchase quickly. For example, a company may give you a 2 percent discount on your purchase if you pay the bill in 10 days rather than wait until the end of the 30-day payment allotment.

  • Purchase Returns: If you’re unhappy with a product you’ve bought, record the value of any returns in this account.

  • Freight Charges: Any charges related to shipping items you purchase for later sale are tracked in this account. You may or may not want to keep track of this detail.

  • Other Sales Costs: This is a catchall account for anything that doesn’t fit into one of the other Cost of Goods Sold accounts.

Detailing expense accounts

Any money you spend on the business that can’t be tied directly to the sale of an individual product falls under the expense account category. For example, advertising a storewide sale isn’t directly tied to the sale of any one product, so the costs associated with advertising fall under the expense account category. The most common expense accounts are:

  • Advertising: This account tracks all expenses involved in promoting a business or its products. Money spent on newspaper, television, magazine, and radio advertising is recorded here as well as any money spent to print flyers and mailings to customers.

  • Bank Service Charges: This account tracks any charges made by a bank to service a company’s bank accounts.

  • Dues and Subscriptions: This account tracks expenses related to business club membership or subscriptions to magazines for the business.

  • Equipment Rental: This account tracks expenses related to renting equipment for a short-term project. For example, a business that needs to rent a truck to pick up some new fixtures for its store records that truck rental in this account.

  • Insurance: This account tracks any money paid to buy insurance. Companies often insure their key owners and executives because an unexpected death, especially for a small company, may mean facing many unexpected expenses in order to keep the company’s doors open.

  • Legal and Accounting: This account tracks any money that’s paid for legal or accounting advice.

  • Miscellaneous Expenses: This is a catchall account for expenses that don’t fit into one of a company’s established accounts.

  • Office Expense: This account tracks any items purchased in order to run an office. For example, office supplies such as paper and pens or business cards fit in this account.

  • Payroll Taxes: This account tracks any taxes paid related to employee payroll, such as the employer’s share of Social Security and Medicare, unemployment compensation, and workman’s compensation.

  • Postage: This account tracks any money spent on stamps, express package shipping, and other shipping. If a company does a large amount of shipping through vendors such as UPS or Federal Express, it may want to track that spending in separate accounts for each vendor.

  • Rent Expense: This account tracks rental costs for a business’s office or retail space.

  • Salaries and Wages: This account tracks any money paid to employees as salary or wages.

  • Supplies: This account tracks any business supplies that don’t fit into the category of office supplies. For example, supplies needed for the operation of retail stores are tracked using this account.

  • Telephone: This account tracks all business expenses related to the telephone and telephone calls.

  • Travel and Entertainment: This account tracks money spent for business purposes on travel or entertainment.

  • Utilities: This account tracks money paid for utilities, such as electricity, gas, and water.

  • Vehicles: This account tracks expenses related to the operation of company vehicles.