More on the Chart of Accounts

Continuing on from my last entry, I would like to explain a little more about setting up your chart of accounts.

Usually, an accountant will have a preferred format for a "standardized" account list or chart of accounts. As I mentioned previously, a lot of accounting packages allow you to use account names without assigning numbers to the individual accounts. My personal preference is to use a numbering system that sets up your account list in the sequence of the accounting equation: Assets, Liabilities, Equities, Revenue and Expenses. There are numerous ways of doing this. Often the easiest route is to simply use a three- or four-digit system until your records require something more sophisticated. I like to have lots of room, so I will use a four-digit system, establishing Assets as beginning with 1, Liabilities beginning with 2, Equities with 3, Income with 4 and Expenses with 5. It is common for "Other Income" and "Other Expenses" to begin with 9, segregating them significantly from the remainder of the categories. Some people prefer a simpler structure, using only three digits. An accounting firm will likely use a simpler system since they may be providing only the information required for the tax return, resulting in putting several of the accounts you use into one larger, single bucket.

As you develop your list, you will want to look ahead at areas that you will anticipate having more accounts that other areas. You may have a lot of fixed asset accounts or inventory accounts, so you will likely want to give those groups a greater range of numbers than your cash or receivables accounts. If you only have one or a few cash accounts, you can get away with accounts 1001, 1005 and 1010, leaving room to add more in between at a later date, if necessary. On the other hand, you may have a variety of types of receivables and use all of the 1100's to keep them together. I think you get the idea. This will work with Equities, also. Rather than using all of the 3xxx account numbers, you may only want to use the 2900's for these accounts. Similarly, the Revenue accounts might be all of the .xxx's or 4xxx's. The next accounts might be the "Cost of Goods" accounts, assigned the 5xxx's, after the revenue accounts have been assigned the 4's.

Once you get into your departmental structuring, you can go down the line, using 6xxx, 7xxx, 8xxx groupings for each department. If you have several parts of a department making all of one parent department, the 7xxx's may be all of the, so you could use the 7's for Sales & Marketing and then break it down to 71xx for Sales, 72xx for Marketing, 73xx for Advertising, etc.

In any event, it's your chart of accounts. Make it easy for others, like your banker or your accountant, to understand and for you to know where to find certain things on your financial statements. Set it up to follow the KISS method: Keep It Simple, Stupid.