'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.
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.
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.
|1021||Allowance for Bad Debts|
|1510||Furniture and Fixtures|
|1511||Accumulated Depreciation - Furniture and Fixtures|
|1521||Accumulated Depreciation - Service Equipment|
|Capital and Drawings|
|3010||Mr. Smith, Capital|
|3020||Mr. Smith, Drawings|
|5050||Bad Debts Expense|
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.