The Chart of Accounts

Something not previously covered is the chart of accounts that make up your general ledger in your accounting software. The concept is plenty simple and has plenty of room for you to make it fit your way of thinking and working. The accounts will follow the accounting equation: Assets, Liabilities, Equity (or Capital), Income and Expenses. I prefer to set up my chart of accounts numerically but it isn't a requirement. Most accounting software will allow you to add accounts "on the fly", identifying them by category as you enter them. The thing that is a problem with this method is that it's easy to duplicate accounts and not know it. This can occur with a numerical system too.

In setting up the chart of accounts, it's typical to follow a common pattern. Here is a generalized sample. As your business develops, you will add accounts within these groups. I hope it's not too confusing.

ASSETS
***Current Assets
***Long term Assets
***Property (Land)
***Plant (the building(s))
***Inventory

LIABILITIES
***Current Liabilities
(ex.: payables, payroll, payroll taxes, current portion of long-term loans)
***Long term Liabilities
Portions of loans due more that one year out

EQUITIES
***Owner's Equity / Capital
***Less: Owner's drawing
***Net Equity or Retained Earnings.

REVENUE
***All sales accounts

EXPENSES
***Segregated by department


The software will put these accounts and any sub-accounts you create into the above categories as you set up the accounts. It will also do the math based on your financial setup.

That's all for tonight. Catch you next time.