Chart of Accounts

Overview


The chart of accounts for a set of books is a listing of the accounts used and what type of account it is (that is asset, equity or liability).

Often times, companies need to be able to classify accounts further than just asset, liability and equity. For example, wages are a type of expense. However, a company may want to break wage expense into salary expense and bonuses. Breaking the data up in this way, allows a company to be more precise in its reporting and analytics.

From a technical perspective, this means creating a tree structure that classifies the accounts, which is called a Chart of Accounts.

General Ledger - The Chart of Accounts


Most chart of accounts break the accounts into a series of categories. Each account is assigned an id, typically a numeric id. Then, the ids are assigned ranges to the various account categories as in the following. 


100 – 199	Assets	Balance Sheet
200 – 299	Liabilities	Balance Sheet
300 – 399	Equity	Balance Sheet
400 – 499	Revenue	Profit & Loss
500 – 599	Cost of Goods Sold	Profit & Loss
600 – 699	Operating Expenses	Profit & Loss
700 – 799	Taxes Paid	Profit & Loss
800 – 899	Other Expenses	Profit & Loss

Assets


Assets represent things that the firm owns which have a financial value. Cash is a simple example of an assset.

Example Asset Accounts 

101	Cash
120 Accounts Receivable
140 Inventory
170 Land 
175 Buildings
180 Equiptment

Liabilities


Liabilities are what the firm owes to other individuals or firms. Whenever the firm borrows money or purchases something on credit, its liabilities go up. The firm also accrues liabilities every day in the form of unpaid wages to its workforce.

Example Liability Accounts 

201	Notes Payable
220 Accounts Payable
270 Wages Payable 
275 Interest Payable

Equity


The equity account in the accounting equation is comprised of two accounts.

  • Paid in Capital - is money and assets that are contributed by the owners of the company
  • Retained Earnings - is the money that is earned by the company and retained as an asset


During the recording process, any transaction that affects retained earning is actually first recorded to a temporary account and then moved to retained earnings at the end of the process. The temporary accounts are of two types

  • Revenue and Gains - represents a financial benefit to the company that increases retained earnings
  • Expense or Loss - represents a financial detriment to the company that decreases retained earnings


The temporary accounts are used in order to measure the change in retained earnings over an accounting period. At the beginning of the accounting period, revenue and expense are set to zero. Over the course of the period, increases and decreases to retained earnings is recorded as a revenue or expense (or gain or loss). At the end of the period, the revenue account represents the gains over the period, and the expenses accounts are the losses. As the books are closed for the period (see below) the balances of the revenue and expenses accounts are moved to retained earnings and zeroed out. 


301	Common Stock
320 Retained Earnings

Temporary Accounts


  • Revenues - Revenues are what the firm earns from selling its products or services.

    Example Revenue Accounts 
    
401 Service Revenue
  • Expenses - 
    
601	Salary Expense
620 Rent Expense
630 Utilities Expense
640 Advertising Expense

Other Revenue and Expense


In addition to the revenue and expense accounts listed above, some organizations also use an other revenue and other expense account. These accounts are used to keep track of the revenues and expenses that are accrued from sources that are not the primary business of the company. This is done in order to separate out the profits from operations that represent the primary source of income for the business, and sources which are temporary in nature.

Contra Accounts


Contra accounts are accounts that are set up "contra" (opposite) to some other account, its companion account. A contra accounts normal balance, whether it is a credit or a debit, is oppposite that of its companion account.

Contra accounts are designed as accounts to hold adjustments to other accounts. The simple example is depreciation, which is created to account for the loss of value to some building or other asset that accrues over time.

The historical cost principle mandates that asset accounts be help at cost, that is, the value paid for them. This means that accountants should not directly subtract depreciation from the asset account, because then its value would no longer reflect histoical cost.

Depreciation is recorded in a separate account, so that the total book value of the asset is the value recorded in the asset account, minus the balance in the depreciation (contra) account.