Chart of accounts definition

What is the Chart of Accounts?

The chart of accounts is a listing of all accounts used in the general ledger of an organization. The chart is used by the accounting software to aggregate information into an entity's financial statements. The chart is usually sorted in order by account number, to ease the task of locating specific accounts. The accounts are usually numeric, but can also be alphabetic or alphanumeric. 

Accounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement. Thus, the chart of accounts begins with cash, proceeds through liabilities and shareholders' equity, and then continues with accounts for revenues and then expenses. Many organizations structure their chart of accounts so that expense information is separately compiled by department; thus, the sales department, engineering department, and accounting department all have the same set of expense accounts. The exact configuration of the chart of accounts will be based on the needs of the individual business.

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Chart of Accounts Best Practices

There are multiple best practices associated with the use of a chart of accounts. Implementing them can greatly improve the efficiency of your accounting operations. Here are some best practices to consider:

• Lock down the accounts. It is of some importance to initially create a chart of accounts that is unlikely to change for several years, so that you can compare the results in the same account over a multi-year period. If you start with a small number of accounts and then gradually expand the number of accounts over time, it becomes increasingly difficult to obtain comparable financial information for more than the past year.

• Lock down subsidiary accounts. Do not allow subsidiaries to change the standard chart of accounts without a very good reason, since having many versions in use makes it more difficult to consolidate the results of the business.

• Shut down accounts with immaterial balances. Periodically review the account list to see if any accounts contain relatively immaterial amounts. If so, and if this information is not needed for special reports, shut down these accounts and roll the stored information into a larger account. Doing this periodically keeps the number of accounts down to a manageable level.

• Require approvals for changes. Given the need for consistency, changes to the chart of accounts should be quite rare. To ensure that only the most essential alterations are enacted, have the controller approve all proposed changes.

Sample Chart of Accounts

Typical accounts found in the chart of accounts are as follows:

Assets:

• Cash (main checking account)

• Cash (payroll account)

• Petty Cash

• Marketable Securities

• Accounts Receivable

• Allowance for Doubtful Accounts (contra account)

• Prepaid Expenses

• Inventory

• Fixed Assets

• Accumulated Depreciation (contra account)

• Other Assets

Liabilities:

• Accounts Payable

• Accrued Liabilities

• Taxes Payable

• Wages Payable

• Notes Payable

Stockholders' Equity:

• Common Stock

• Preferred Stock

• Retained Earnings

Revenue:

• Revenue

• Sales returns and allowances (contra account)

Expenses:

• Cost of Goods Sold

• Advertising Expense

• Bank Fees

• Depreciation Expense

• Payroll Tax Expense

• Rent Expense

• Supplies Expense

• Utilities Expense

• Wages Expense

• Other Expenses

Chart of Accounts Mapping

If you acquire another company, a key task is shifting the acquiree's chart of accounts into the parent company's chart of accounts, so that you can present consolidated financial results. This process is known as mapping the acquiree's information into the parent's chart of accounts.

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