- Rules of Debits & Credits for the Balance Sheet & Income Statement
- Which of the Accounts Will Not Appear on a Post-Closing Trial Balance?
- Accounting Procedures for Tracking Money Flow
- How to Make General Journal Entries With Generally Accepted Accounting Principles
- Agency Theory vs. Accounting Theory
- Examples of External Financing Alternatives
A list, or chart, of accounts is used in accounting as a way to capture and record financial transactions in a company's general ledger. This chart of accounts is a categorized list of every account title set up to store the firm's financial transaction data. The accounts rely on specific naming methods and other details that define what transaction types they should hold.
A company's chart of accounts is separated into groups, or categories, that correspond to the financial statement reporting items and sections. A numerical code is attached to each account title, based on where the account resides on the balance sheet or income statement. Charts of accounts tend to follow industry-accepted practices; for example, all account numbers have four to six digits, and all asset accounts are created in the numerical range of 1000 to 1999. All other accounts are segmented in an order that corresponds to the balance sheet and then income statement line items.
Within each main titled category on the cart of accounts, such as assets, liabilities or operating expenses, there exists many sub-accounts. Larger companies may have a substantial number of sub-accounts. These account titles might use a hyphenated name with two or three parts to designate certain characteristics. For example, sales revenue for a certain widget sold in several companies may be recorded by country in accounts with titles such as "product revenue -- widget 1 -- Philippines." This type of account may have a numerical code that is also made up of three sets of alpha-numeric characters.
Account titles help accountants understand what a given account balance should look like. Every account title has a "normal" balance. For example, if an asset account has a normal credit balance, that means that when an accountant increases it, the entry is recorded as a credit entry, not a debit. Expense accounts have a normal debit balance, meaning they increase with debit entries. An accountant relies on properly titled accounts to tell her whether she should use a debit or credit to increase the balance of the account.
Producing Financial Statements
Account titles provide guidelines for how accounting information is shown on the firm's financial statements. Account titles should be as descriptive as possible. Complex corporations with a large product set and global operations usually have extremely detailed account titles in their chart of accounts, or use different tiers or levels of accounts. This allows firms to record transaction data in great detail and accommodate business changes over time without losing the ability to directly compare historical data against current performance. A detailed chart of accounts enables a company to produce analytical reports that assess its business from a variety of cross-sectional viewpoints, allowing evaluation of the firm's performance from several different angles.