Chart of Accounts

Overview


The chart of accouns for a set of books is a listing of the accounts used in those books 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 the base type. For example, wage expense is a type of expense. However, a company may want to break wage expense into salary expense and bonuses. That is, salaries and bonuses are both types of wage expense, and wage expense is a type of expense. Breaking the data up in this way, lets one run a query that could break the two types of wages into separate buckets.

This means creating a tree structure that classifies the accounts. For many companies, the tree structure they create becomes the chart of accounts. However, many companies find the need to slice and dice their data in different ways, and this may mean maintaining separate tree structures to accomodate the different queries. One way to accomodate this is to maintain a flat chart of accounts, and to maintain separate tree structures for use in querying the ledger data.

General Ledger - The Chart of Accounts


Most chart of accounts break the accounts intoa series of categories. Each account is assigned an id, typically a numeric id. Then, the ids are assigend 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

General Ledger - Assets


Assets represent things that the firm owns which have a financial value. Cash is a simple examle of an assset, but the assets can range from other financial assets, to the firm's buildings and inventory.

Example Asset Accounts 

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

General Ledger - 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

General Ledger -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 compnay
  • 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

General Ledger - Revenues


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

Example Revenue Accounts 

401 Service Revenue

General Ledger -Expenses


Example Expense Accounts 

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.

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