Setting Up the Chart of Accounts

1. Assets (Account Code use – 1000 (Example 1001,1002,1003))

i. Current Assets
ii. Fix Assets
2. Liabilities (Account Code use – 2000)
3. Owner's Equity(ရင်းနှီးမြှ ုပ်နှံ ငွေ ) (Account Code use – 3000)
4. Revenue (ဝင်ငွေ) (Account Code use – 4000)

Include (sales discounts and sales returns and allowances)

Include (discounts from suppliers, costs of shipping, and miscellaneous

sales costs.)

5. Expenses (အသုံ းစရိတ်) (Account Code use – 5000)

A chart of accounts is an organized list of all accounts in a business entity’s financial

records. An account is where a financial transaction is classified, allocated, or posted.
(These terms all mean the same thing.)

Every account has a balance based on additions and subtractions made since it was
opened (or during a specified period of time). So summaries or totals of balances of
various types or groups of accounts are often included when displaying a chart of
accounts. But strictly speaking, only the accounts themselves make up the chart of
accounts.

The chart of accounts will:

 Govern how every single transaction a business makes is recorded

 Determine what information management views to make important decisions

 Support government regulatory and tax filings

 Organize information for presentation to bankers, owners, creditors, and auditors

So it should be thought out carefully. Once it has been developed, written descriptions
of which types of transactions are posted to each account are convenient reminders and
can be helpful during audits, when working with accountants, and for training new users
or reminding established ones.

Although the effort of building a good chart of accounts produces no direct revenue, it
costs little or nothing, but will improve operations far into the future. A well-designed
chart of accounts ultimately makes your business easier to manage and can save time
and money. Understanding some basics will help you develop a good one.

Types of accounts

Accounts have been classified the same way by accountants and bookkeepers
everywhere for over 500 years. (Nobody said accounting was exciting.) Classification
depends on whether accounts depict your current financial position or determine your
performance over a period of time. They are named for the two most important financial
statements of any company: the balance sheet and the profit and loss (P & L) statement,
also called the income statement.

Accounts depicting position are called balance sheet accounts, because they appear on
the balance sheet. (See, this is easy!) They are also sometimes referred to as permanent
or perpetual accounts, because they carry forward from one accounting period to
another. When up to date, they define the state of a business at the current moment.

Balance sheet accounts

 Asset accounts represent the value of what you own, including cash, inventory,

fixed assets, and other things.

 Liability accounts represent what you owe to others outside the business,

including loans, employee wages earned but not yet paid, and so forth.

 Equity accounts record how much money is invested in the business, including

profits that have not been distributed. Equity can be thought of as the net worth

of a business. (Net worth is different from value, which is what someone might

pay to buy the business.)

Accounts determining performance are called profit and loss or income statement
accounts, because they appear on reports of the same name. (You probably predicted
that.) Balances for these accounts are calculated over a specified timeframe or
accounting period, such as a month, quarter, or year.

Profit and loss accounts

 Income (or revenue) accounts record amounts earned by the business

 Expense accounts record amounts spent on business activities (not including any

withdrawals, dividends, or distributions to owners or shareholders)

Businesses may subdivide their accounts into elaborate hierarchies. But all accounts are
one of those five basic types. There are no exceptions. (That would be too exciting.)

Accounting equations

Accounting begins with the simple equation:

Assets – Liabilities = Equity

This is just an accountant’s way of saying the difference between what a business owns
and what it owes is its net worth. (You already knew that, right? This is getting simpler.)

To make things seem mysterious so they can keep their jobs, accountants like to
scramble that equation a little by moving Liabilities to the right side of the equation
(reversing the sign, of course):

Assets = Liabilities + Equity

This version of the equation says the sum of all asset account balances must equal the
sum of all liability and equity account balances. Details of this balance constitute your
financial position at any given time. A proper chart of accounts and good accounting
procedures make sure the two sides of the accounting equation are always equal. That’s
what shows on a balance sheet, nothing more, though specific accounts in each type
and their arrangement may vary.

Example
Ravi has a bank account balance of 10,000 to start his messenger service. That is an
asset. But 8,000 of that amount was obtained as a loan, a liability. Ravi’s equity, or net
worth, is 2,000. In fact, that is the amount he had saved and put into the business
venture. His accounting equation is:

10,000 (Assets) = 8,000 (Liabilities) + 2,000 (Equity)

But how can a business grow (or fail, for that matter)? This is where those profit and loss
accounts fit into the picture. Revenue earned by a business adds to Assets, possibly by
increasing a bank account. Or it might take the form of a receivable, that is, an amount
earned and invoiced to a customer but for which money has not yet been received from
the customer. A receivable is still an asset, because it has value to your business.

In contrast, expenditures by the business effectively decrease assets, reducing that bank
account or creating a payable, or amount owed to a supplier. The accounting equation
can be extended:

Assets = Liabilities + Equity + Income – Expenses

Elements of this equation can be grouped without changing its meaning:

Assets = Liabilities + Equity + (Income – Expenses)

The portion in parentheses is called net profit and is what shows on the profit and loss
statement and defines your performance. So the extended equation combines position
and performance into one calculation, merging status at a moment with changes not yet
transferred into the permanent accounts.

If you spend less than you make, you are profitable. Profits can increase your Assets. Or
they can reduce your Liabilities. Either increases Equity. The creative aspect of business
involves using Assets, Liabilities, and Equity to generate profits. Eventually, profits are
converted to Equity and can be moved out of the business and into owners’ pockets.
The chart of accounts guides and records that process. (And you thought accounting
would be completely boring. Well, it mostly is, until you get to the last step about
putting money in your pocket.)

Debits and credits

The extended accounting equation can be ungrouped and rearranged one more time:

Assets + Expenses = Liabilities + Equity + Income
Why bother? Because this version can help you understand the deepest mystical secrets
of accounting: debits and credits. Scholars, Latin linguists, and historians disagree about
origins of those terms, including who first used them, when, and in what language. Every
story is thorough and convincing. But you don’t need to know any of them.

You only need to know two things about debits and credits:

 Your natural understanding of them from dealing with banks, merchants, and

others who send you bills is probably backwards. The terms they use are not from

your perspective, but from your bank’s or the merchant’s. All accounting is done

from the perspective of the one keeping the books. So your bank’s debit is your

credit.

 For accounting purposes, debit means “on the left” and credit means “on the

right.”

Looking at the rearranged equation just above, Asset and Expense accounts are debit

accounts. They are on the left side of the equal sign. Liability, Equity,
and Income accounts are credit accounts. They are on the right. (Pretty simple, eh?)

A debit transaction increases a debit account. A credit transaction increases a credit

account. The reverse is also true. Debit transactions decrease credit accounts and credit
transactions decrease debit accounts. So (here comes the magic), you can determine
whether a transaction is a debit or credit by whether it increases an account on the left
(a debit) or the right (a credit). (Yes, you can do it the other way round, too, but that’s
harder to remember.)

This relationship between debits and credits and the need to keep both sides of the
accounting equation in balance led more than five centuries ago to invention of double-
entry accounting. Every transaction starts out as a debit or credit posted to one of the
accounts in your chart of accounts. But to balance your books, it must be offset by an
opposite credit or debit to a different account.

Example
Ravi begins operating his messenger service. During the first month, he spends 2,500
from his bank account to pay operating costs. The transactions increase
various Expense accounts on the left side of the equation. So the Expense accounts are
debited. They also decrease his bank account, an Asset account, also on the left side. So
the bank account is credited the same amount. (Yes, a payment from a bank account is a
credit, showing that what you probably thought you knew was wrong.)

At the end of the month, Ravi deposits 4,000 received from customers into the bank.
This transaction increases an Asset account, on the left side, so the bank account is
debited. To balance this, an Income account, on the right side, is credited with 4,000.
After these changes, Ravi’s bank balance is 11,500, and his extended accounting
equation is:

11,500 (Assets) + 2,500 (Expenses) = 8,000 (Liabilities) + 2,000 (Equity) +4,000 (Income)

Everything is still in balance. Ravi’s new business is profitable and growing.

Fortunately, when using Manager, you don’t have to remember most of this. Except for
occasional journal entries, all transaction forms in Manager determine which accounts to
debit and credit based on context. When faced with a decision, refer back to this Guide.
And remember the rule that debits increase debit accounts and credits increase credit
accounts.