As a small business owner, it's important to accurately track all the money that goes into and out of your accounts. Every transaction you make - from payroll to paying down a line of credit - should have its own record.
It's not as simple as writing down each transaction, though. Each debit or credit, depending on the nature of the transaction, will likely be associated with its own financial account.
In addition to keeping individual transaction records, you should also create a chart of accounts as part of your bookkeeping. This offers a visual snapshot of how your business spends money. Essentially, it's a list of all of your company's financial accounts organized in a general ledger.
This article will review what a chart of accounts is and why it's important to the financial health of your company. We'll also offer tips on how to create a chart of accounts and how Skynova's software products might be useful.
What Is a Chart of Accounts?
A chart of accounts is an integral document for all business owners. It allows you to easily track your organization's financial health by putting all of your company's accounts at your fingertips.
Essentially, it's a filing system for your financial accounts. It's used to track all the money that comes and goes in one place while also helping you understand how your money is spent and where revenue is coming from.
The main types of accounts are assets, liabilities, revenue, expenses, and equity. These should have their separate records but also be organized into one main chart of accounts. The number of accounts you organize in your general ledger will vary based on the size of your company. The smaller your operations, the smaller your chart of accounts will likely be.
What Is the Standard Chart of Accounts?
Generally, you'll find two main categories in a standard chart of accounts: balance sheet accounts and income sheet accounts. These two categories have subcategories to better track and understand your spending and revenue.
Balance Sheet Accounts
Your balance sheet accounts primarily track three types of transactions: those involving your business's assets, liabilities, and owner's equity. The balances of these accounts are included in your annual balance sheet and reviewed at the end of each year. However, the balances aren't closed at the end of each accounting period. Instead, they carry over into the next accounting period and are considered permanent or real accounts.
Income Statement Accounts
Your income statement accounts are used to record four types of transactions: operating revenues, operating expenses, non-operating revenues and gains, and non-operating expenses and losses. The larger your business, the more income statement accounts you might have as you budget and report across numerous company brands, products, and departments.
Unlike balance sheet accounts, income statement accounts close at the end of each accounting period. At this time, their balances are combined, and the net amount moves over to the balance sheet equity account. They start over with a zero balance during the new accounting period.
How Are Accounts in the General Ledger Numbered?
As a blueprint for your company's financial well-being, your chart of accounts will include several financial categories. To better track each transaction that falls within each category, each category will be assigned a number.
Most businesses assign an account number from three digits to five digits long to represent each account type. Each account type will begin with a different number. For instance, your asset accounts may start with "1," your liability accounts may begin with "2," and so on. This numbering system is key to how your records are stored and later retrieved as needed.
When you list and number your types of accounts, your current assets come first. These accounts track all money coming into your company and also record anything of value that your business owns, including real estate, company cars, inventory, and cash.
Consider this example of current assets to better visualize how they're organized. This will vary for your business based on the types of accounts your company actually uses, but it'll look similar.
|Current Assets (account numbers 1000 - 1599)|
|1100 Cash Account - General Checking Account|
|1150 Cash Account - Payroll Checking Account|
|1200 Petty Cash|
|1250 Accounts Receivable|
|1300 Reserve for Bad Debts|
|1450 Prepaid Insurance|
Property, Plant, and Equipment (PP&E)
Items of value that you own (generally fixed assets) are included in your chart of accounts. This includes office supplies (such as computers and printers), real estate owned by your company (from parcels of land to manufacturing plants), company-owned vehicles, and even the art hanging on your walls.
Since these tangible items of value are considered assets, they'll start with "1." Here's an example of how you might organize this section. When you create your own version of it, your types of accounts might vary based on your business.
|Property, Plant, and Equipment (account numbers 1600 - 1999)|
|1800 Accumulated Depreciation (Land/Facilities)|
|1850 Accumulated Depreciation (Equipment)|
|1900 Accumulated Depreciation (Vehicles)|
Your liabilities are any debt your business has. Anything you owe gets tracked under liabilities.
To better understand how your current liabilities - credit lines, wages, etc. - should be organized, here's an example of accounts that would fall under this category and how they might be numbered. Remember, your company might not include the exact same accounts.
|Current Liabilities (account numbers 2000 - 2299)|
|2000 Notes Payable (Credit Line A)|
|2050 Notes Payable (Credit Line B)|
|2100 Accounts Payable|
|2150 Salaries/Wages Payable|
|2200 Interest Payable|
|2250 Deferred Revenues|
Your long-term liabilities, which include debts like mortgages and bonds, are listed after your more current liabilities. They also start with "2," though. Here's an example of how they might be organized.
|Long-Term Liabilities (account numbers 2300 - 2499)|
|2300 Mortgage Loan Payable|
|2350 Bonds Payable|
|2400 Unamortized Bond Discount Payable|
The stockholders' equity measures your company's net worth. It's determined by subtracting your business liabilities from your assets. Your shareholders' equity could include several types of accounts, including common stock, retained earnings, and treasury stock. Here's how you might organize these accounts in your chart of accounts.
|Stockholders' Equity (account numbers 2500 - 2999)|
|2500 No-Par Stock Shares|
|2750 Retained Earnings|
|2950 Treasury Shares|
Your operating revenue is generated from your company's primary activities. For instance, if you're an artist, the revenue from the art you sell would go here. If you're in retail, merchandise sales would fall under this section. Larger companies will likely have several areas bringing in operating revenue and might want to track these revenues across divisions, departments, or product lines.
As an example, here's how you might consider organizing your various operating revenue accounts.
|Operating Revenues (account numbers 3000 - 3999)|
|3101 Sales Division A - Product Line 01|
|3102 Sales Division B - Product Line 02|
|3201 Sales Division C - Product Line 03|
|3311 Sales Division D - Product Line 04|
Cost of Goods Sold (COGS)
The cost of goods sold (COGS) refers to how much it costs your company to produce an item or service that you sell. It includes direct costs, such as freight, storage, shipping, direct labor to build these products, and the cost of parts. If you're running a larger company, you'll likely want to track your COGS by department or product line in your chart of accounts.
Here's an example of what that might look like.
|Cost of Goods Sold (account numbers 4000 - 4999)|
|4101 COGS - Division A, Product Line 01|
|4102 COGS - Division B, Product Line 02|
|4201 COGS - Division C, Product Line 03|
|4311 COGS - Division D, Product Line 04|
Marketing costs refer to all expenses associated with actually selling your product or service. As a primary business function, it gets its own section in your chart of accounts. It includes everything from salaries and supplies to marketing research and advertising costs.
The type of marketing accounts your company has will vary based on the type of product you're selling or service you offer, as well as the size of your business. Here's an example of how this section could be organized in your chart of accounts.
|Marketing Costs (account numbers 5000 - 5099)|
|5010 Marketing Salaries|
|5015 Marketing Payroll Taxes|
|5020 Marketing Supplies|
|5060 Marketing Telephone|
Your payroll expenses include any expenses associated with compensating your employees. This includes salaries and wages, as well as payroll taxes, supplies, and benefits. This will vary from business to business, but here's an example of how you might organize your various payroll expense accounts in the chart of accounts numbering system.
|Payroll Dept. Expenses (account numbers 5900 - 5999)|
|5910 Payroll Salaries|
|5915 Payroll Taxes|
|5920 Payroll Supplies|
|5960 Payroll Telephone|
Let Skynova Help You Manage Your Small Business Accounting System
Skynova's all-in-one invoicing and accounting software makes it easy to keep accurate financial records for your company. Track all of your accounting information - income, expenses, sales tax, payments, and more - in one place and run regular reports to review your company's financial statements.
We offer a range of business templates and software products to make sure you're prepared for all of your business needs. Our intuitive and easy-to-understand modules simplify the process of small business accounting and operations.
Notice to the Reader
The content within this article is meant to be used as general business guidelines and may not apply to your specific company. Always consult with a professional accountant to ensure that you're meeting accounting standards and accurately organizing your chart of accounts.