Chapter 2

Chart of Accounts

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 nonfinancial information, and these do not appear in the general ledger.

Should I Update the Chart of Accounts?

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, ...

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