'Chart of Accounts' Definition:

A chart of accounts is an accounting tool that contains a list of all accounts used by a business. Different companies use different account titles. The specific accounts used by a company is detailed in its chart of accounts.

Contents:
  1. Definition of chart of accounts
  2. Purpose
  3. Coding system
  4. Example
  5. Other notes

Purpose of the Chart of Accounts

A chart of accounts contains all the accounts used by a business. It is a useful tool to the accountant or bookkeeper in knowing what account titles to use in recording transactions. Account titles used by companies vary and may depend upon the industry of the business, the type of ownership, preferences, and other factors. The use of a consistent set of accounts is needed for an effective and efficient accounting system.

Coding System

The accounts in the chart of accounts are grouped and each is given a code or account number. The account number serves as a unique identifier or an "ID" for each account.

A systematic coding or numbering system is often used. For example: asset accounts start from account #001 to 199, liability accounts start from 200 to 299, capital accounts use 300 to 399, revenue accounts from 400 to 499, and expense accounts from 500 to 599.

Large businesses also use account numbers or codes that contain vital information. For example, 501S may be assigned for salary expenses incurred by the selling department, and 501A for salary expenses of the administrative office.

There no standard chart of accounts. The coding system and the contents of the chart of accounts largely depend upon the need and preferences of the business using it.

Chart of Accounts Example

Here is a simple chart of accounts of a small business.

Assets
1010 Cash
1020 Accounts Receivable
1021 Allowance for Bad Debts
1030 Notes Receivable
1040 Interest Receivable
1050 Prepaid Rent
1060 Office Supplies
1510 Furniture and Fixtures
1511 Accumulated Depreciation - Furniture and Fixtures
1520 Service Equipment
1521 Accumulated Depreciation - Service Equipment
   
Liabilities
2010 Accounts Payable
2020 Notes Payable
2030 Interest Payable
2040 Salaries Payable
2050 Utilities Payable
   
Capital and Drawings
3010 Mr. Smith, Capital
3020 Mr. Smith, Drawings
   
Revenues
4010 Service Revenue
4020 Interest Income
   
Expenses
5010 Salary Expense
5020 Rent Expense
5030 Interest Expense
5040 Utilities Expense
5050 Bad Debts Expense
5060 Depreciation Expense
5999 Miscellaneous Expense

Other Notes

The chart of accounts may be changed over time to suit the needs of the business. New accounts may be added as the need arises and old accounts may be updated. However, care should be observed so as not to mess up the previous books and records, especially when the chart of accounts are linked to them in a computerized accounting environment.

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