What is a Chart of Accounts, and Why Should I Create One?

Regardless of whether you choose to invest in professional bookkeeping services or opt to be a DIY bookkeeper for your business, it’s important to know what a Chart of Accounts is, why you should create one, and how it can help your business in the long run. Simply put, a Chart of Accounts is a list of different account categories that your business transactions will fall under.

The five fundamental categories of accounts are: asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts. Each of these categories will have multiple accounts in their section, and each account can be broken down into sub-accounts if necessary. Let’s look at each account category and go over some examples of main and sub-accounts:

• Assets:

  • Main Account Examples: cash, accounts receivable, inventory, equipment.

  • Sub-Account Examples: petty cash, finished goods, vehicles, buildings.

• Liability Accounts:

  • Main Account Examples: accounts payable, loans payable, accrued expenses.

  • Sub-Account Examples: vendors, credit cards, accrued wages/payroll.

• Equity Accounts:

  • Main Account Examples: retained earnings, common stock, owner’s equity.

  • Sub-Account Examples: specific partner investments, dividends payable.

• Revenue Accounts:

  • Main Account Examples: sales revenue, service revenue, investments.

  • Sub-Account Examples: specific product and service sales, interest revenue.

• Expense Accounts:

  • Main Account Examples: cost of goods sold, payroll, rent, utilities.

  • Sub-Account Examples: water, electricity, gas, office supplies, subscriptions.

The way that you organize and record your transactions affects your financial data, and it is the most important reason why having a Chart of Accounts is necessary. Above, you see how many different categories, accounts, and sub-accounts there can be; and the ones listed above are only a small portion. Tying back to our blog post “Categorizing Transactions: Why Does it Matter?”, when your books are detailed, you have clearer financial data. You can see where your business makes the most money, and also where you spend the most for expenses.

Managing your books and knowing how to categorize transactions in your Chart of Accounts can be overwhelming and confusing, but that’s why we’re here to help! Reach out to us today to schedule a meeting, and receive a free quote on bookkeeping services.