Every business should have a chart of accounts. If you’re wondering what exactly that is, we have you covered. We’ll explain everything you need to know and include an example chart of accounts below.
Note, if you use Xendoo for your accounting, we can set up and maintain your chart of accounts for you.
What Is the Chart of Accounts?
A chart of accounts is a list of all the accounts and financial transactions for your business in one location. It is like a table of contents for your accounting system. Accountants and business owners use the chart of accounts to organize how they make and spend money.
By categorizing financial transactions, you can more easily create statements like balance sheets. Additionally, it shows you the big picture of your financial health and day-to-day operations.
Chart of Accounts Types
As an example, a chart of accounts is usually organized into five main categories:
You or your accountant will use these account types to create a balance sheet and income statement. The balance sheet includes assets, liabilities, and equity accounts. On the other hand, the income statement includes revenue and expense accounts.
- Balance Sheet = Assets + Liabilities + Equity
- Income Statement = Revenue + Expenses
Balance Sheet Chart of Accounts
Assets are resources a company owns and can use to produce value. These resources may be intangible assets like software or current assets like petty cash. Other examples of assets:
- Accounts receivable
In general terms, liabilities are what your business owes. Transactions in a liability account include:
- Accounts payable
- Accrued expenses
- Taxes payable
- Customer deposits
Equity is the amount you have after deducting your liabilities from assets. The term equity is also used to describe a company’s value to shareholders. It makes sense then that equity in a chart of accounts includes the following:
- Common stock
- Retained earnings
- Preferred stock
Income Statement Chart of Accounts
Expenses are all the costs you incur in your business, whether it’s paying utility bills or employees. Other examples of common expenses include:
- Bank fees
You record from selling products or services in revenue accounts. Revenue also includes investment income and sales returns.
How Does the Chart of Accounts Work?
Depending on your business, an example chart of accounts might be organized into specific columns that include:
- Reference numbers (Codes)
- Account name
- Account type
When recording transactions in the charts of accounts, you assign reference or account numbers to entries. The number tells you which account a transaction belongs to based on the number’s first digit.
If it begins with one, it is an asset transaction. Those that start with two, three, four, and five represent liability, equity, revenue, and expense transactions, respectively.
For instance, asset accounts range from 100 to 199 while liability accounts are between 200 and 299. The account number in the chart of accounts varies with every business.
Some charts of accounts use four digits instead of three, but the first digit remains the same. You can use four-digit codes—assets (1000 to 1999) and liability accounts (2000 to 2999).
You may also have a cost of goods sold (COGS). In that case, it is typically recorded with numbers starting with a five, and expenses are recorded starting with a six.
Before there was accounting software, accountants used this coded method to organize the chart of accounts on paper.
Most accounting software technologies automatically assign numbers (codes), making the entire process seamless. Accounting software also minimizes manual data entry by balancing your debits and credits for you.
Chart of Accounts Examples
The following examples illustrate how a fictional business—XYZ—might record transactions in its chart of accounts.
Transaction 1: A business XYZ withdraws $600 from its bank account to buy a heavy-duty printer. To accurately record the transaction, the business must credit $600 to their cash account and debit $600 to the equipment account.
Transaction 2: XYZ uses $2,000 to pay rent. In the chart of accounts, XYZ will credit $2,000 to the and debit $2,000 to the expense account for rent.
Transaction 3: The business owners in XYZ limited company bring in cash of $200,000 as additional capital. The business will credit the equity account and debit the cash account in the chart of accounts.
Here’s a sample chart of accounts to give you a typical overview. Keep in mind that it is not exhaustive. Your chart of accounts will likely have slightly different codes and more accounts listed.
|Account Number||Account Name||Type||Financial Statement|
|1200||Accounts receivable||Asset||Balance Sheet|
|1500||Office Equipment||Asset||Balance Sheet|
|2010||Accounts payable||Liability||Balance Sheet|
|2020||Sales tax payable||Liability||Balance Sheet|
|3010||Additional capital||Equity||Balance Sheet|
|3030||Retained earnings||Equity||Balance Sheet|
|5010||Raw material||Cost of Goods Sold||Income Statement|
|6010||Advertising fees||Expenses||Income Statement|
|6020||Bank fees||Expenses||Income Statement|
|6030||Bad debt expense||Expenses||Income Statement|
How Do You Update the Chart of Accounts?
The rules for updating your chart of accounts are straightforward. Add new accounts throughout the year but wait till the year ends to delete old accounts.
If you delete, merge, or rename accounts before the year ends, you can face troubles during tax season.
You must make a double entry each time you record a transaction in the chart of accounts. Double-entry accounting is when you debit one account and credit another. The sum of the two entries must always be zero.
Suppose you own a hardware store and sell $1,000 of tools. You would debit the cash account $1,000 and credit the revenue account $1,000 on the charts of the account.
You should also leverage accounting software like Quickbooks to automatically update your chart of accounts. Quickbooks can record debit and credit transactions automatically. It also has a chart of accounts template. You’ll want to be careful to choose the correct account type for each transaction. The account type will determine what transactions appear on the balance sheet and income statement.
If you have Xendoo, you get Quickbooks and a team of expert bookkeepers and accountants to create your chart of accounts for you. If you don’t, you can get a free trial or schedule a call with a Xendoo accountant.