A chart of accounts is created in a business’s general ledger to record all the financial transactions and balances. The chart of accounts acts as an index and lists every account in the general ledger in subcategories.
A chart of accounts is used to organize all the financial balances to make it easier for bookkeeping and for stakeholders to better look at the finances. The chart of accounts index is created to categorize each account differently by giving them a name and a brief description of the category.
Most of the time, the categories are also given an identification code to locate the accounts quickly. For startups or small businesses, the chart of accounts is a foundation for all the bookkeeping and double-entry systems.
For small businesses, including many different accounts in the chart of accounts is not essential as it will complicate and confuse things. A chart of accounts helps a bookkeeper identify what account to perform the transaction in.
A small business chart of accounts mainly consists of five major categories. The main types of accounts a chart of accounts include are Revenue, Expenses, Assets, Liabilities, and Equity.
Revenue: As the income statement already includes the revenue, the revenue account in the charts of accounts is almost the same as the income statement. The revenue account keeps track of all the incomes the business earns, such as sales, rent receivable, or other charges for your services.
This account will help you determine the errors performed while bookkeeping and will identify the difference in balances. The revenue account also includes the cost of sales, and it is essential to remember to include this in your revenue accounts. It will consist of the discounts the suppliers offer you, along with the transportation costs you charge or the ones charged to you.
Expenses: The expenses account in the chart of accounts includes all the expenditures you perform in your organization to generate sales, such as wages and salaries, utilities, and rent. An easy and efficient way to record your expenses is by using the IRS’s Internal Revenue Service tax form, readily available online.
The Internalnalnue service tax forms report financial information to the Internal Revenue Service. This form is efficient as it can be used for two purposes: filing taxes and recording expenses in the chart of accounts.
Assets: The assets account in the chart of accounts is listed below the balance sheet accounts. This is called a balance sheet account, as assets are essential while creating a balance sheet. Assets are valuables a business has that are used in the process of generating revenue for the business. Land and buildings, Equipment, Inventory, and Cash are a few examples of assets.
Liabilities: Liabilities are also listed below the balance sheet accounts. Liabilities are debts that go to another party, which can be in the property or any equipment. Examples of liabilities are loans from banks, trade payables, and mortgages.
Equity: Equity or capital is the difference between the aa businesses and the liabilities, representing the leftover funds in the business after the liabilities have been subtracted from the assets. The equity includes all the investments made in the business. For a sole trader, the capital they invest in the business is called Equitequityity and identifies its value after all the calculations are made.
The chart of accounts helps separate the major accounts into different categories to help you have a better look at the financial situation. You can identify what part of your accounts needs more attention and improvement and work on it specifically.
It gives you an idea of what is going on in your business. You can provide the information from the charts of accounts to your stakeholders, especially potential investors or shareholders. The chart of accounts can also be used in the decision-making process. The accounts mentioned above are the major and the most important accounts to include in your chart of accounts index.
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