What is a chart of accounts?

The chart of accounts is a list containing all of the general ledger accounts. The first column of the chart contains the account number for each account, and the second column contains the name of the account.

You use a chart of accounts as a reference tool for deciding which account to use for recording a transaction. If you are using a computerized accounting system, then you should flag as inactive those accounts in which you no longer want to store transactions, so that they no longer appear on the chart of accounts.

The chart of accounts numbering system usually begins with asset accounts, followed by liability accounts, equity accounts, revenue accounts, and finally expense accounts. There may also be miscellaneous accounts at the bottom of the chart for storing non-financial information, and which do not appear in the general ledger.

It is common to periodically update the structure of the chart of accounts in order to more accurately reflect changes in the business. For example, there may no longer be a production department, due to outsourcing, so all production expense accounts are no longer relevant. Also, some accounts may contain such small transactions that it no longer makes sense to record information in them. Further, new regulatory requirements may force a business to begin separately recording certain types of transactions. Finally, if you acquire another business, you may have to create new accounts to handle special transactions that only the acquired entity needs. Consequently, incremental changes to the chart of accounts are to be expected.

If you do alter the chart of accounts, be aware that this makes it more difficult to compare the company's current financial results to those of prior periods, since the information may now be stored and presented differently.

Related Topics

3-digit chart of accounts
5-digit chart of accounts
7-digit chart of accounts
Alphanumeric account codes
Chart of accounts overview
Reduce the chart of accounts
Standardize the chart of accounts