What Is the Chart of Accounts? - dummies

By Maire Loughran

A company’s chart of accounts is an index of the financial accounts that a business uses in its accounting system and that it posts to its general ledger — the record of all financial transactions within the company during a particular accounting cycle.

Companies use charts of accounts to organize their finances and separate expenditures, revenue, assets, and liabilities to get a clear picture of the financial standing of the company. The chart of accounts contains account names and account numbers. Most accounting software programs use a similar numbering sequence, shown here.

Numbering Sequence: Accounting Programs
Number Sequence Account Type
1,000 to 1,999 Assets
2,000 to 2,999 Liabilities
3,000 to 3,999 Equity
4,000 to 4,999 Income
5,000 to 5,999 Cost of goods sold
6,000 to 7,999 Operating, general, administrative expense
8,000 to 9,999 Non-business-related items of income and expense

A computerized system may have classifications and subclassifications of accounts based on the type of account or category. For example, a system may classify all cash accounts in the 1,100–1,199 series, accounts receivable in the 1,200–1,299 series, and so on.

The chart of accounts isn’t a financial report. It’s merely a list of all accounts you’ve previously set up to handle the company transactions. Here’s a description of the chart of accounts cast of characters:

  • Assets are resources a company owns. Some examples are cash, equipment, and vehicles.

  • Liabilities are debts the company owes to others. The biggie liabilities you encounter in your intermediate accounting class are accounts payable, notes payable, and bonds payable.

  • Owners’ equity is what’s left over in the business at the end of the day — a company’s assets minus its debts. Equity components differ depending on the type of business entity. There are three basic entities: sole proprietorships, corporations, and flow-through entities such as partnerships.

  • Income is revenue the business takes in for the products or services it sells. It doesn’t include income from any other sources not related to the main purpose of the business. Those go in as nonbusiness income.

  • Cost of goods sold (COGS) expenses directly tie back to products a business either makes or wholesales. Examples are direct labor and raw materials.

Whether a business is a manufacturer or merchandiser affects how COGS shows up on the income statement. Accounting for a merchandising company COGS is easier than a manufacturer.

That’s because the merchandiser only has one class of inventory to keep track of: goods the business purchases from manufacturers for resale while the manufacturer has to account for all the bits and pieces plus the labor involved in making goods available for sale.

Service companies that don’t make or sell a tangible product, like a dentist or doctor, won’t have a COGS.

  • Operating, general, and administrative (G & A) expenses accounts reflect all expenses a business incurs while performing its business purpose that do not directly relate to making or wholesaling a product — in other words, any expense that’s not a COGS. Some examples are rent, office salaries, and postage expenses.

  • Non-business-related items of income and expense is the classification used for money brought in or spent that generally accepted accounting principles (GAAP) state are not directly related to business. For example, if a company sells an asset at a loss, that’s an example of a nonbusiness expense.