What Do You Understand By Charts Of Accounts?

Companies use a chart of accounts to organize their finances and give interested parties, such
as investors and shareholders, a clearer insight into their financial health. Separating
expenditures, revenue, assets, and liabilities help to achieve this and ensure that financial
statements are in compliance with reporting standards.

The chart of accounts should give anyone who is looking at it a rough idea of the nature of
your business by listing all the accounts involved in your company’s day-to-day operations.

Example:
Many organizations structure their so that expense information is separately compiled by
department; thus, the sales department, engineering department, and accounting department
all have the same set of expense accounts. Examples of expense accounts include the cost of
goods sold , depreciation expense, utility expense, and wages expense.

Charts Of Accounts Works

Companies use a chart of accounts to organize their finances and give interested parties, such
as investors and shareholders, a clearer insight into their financial health. Separating
expenditures, revenue, assets, and liabilities help to achieve this and ensure that financial
statements are in compliance with reporting standards. The list of each account a company
owns is typically shown in the order the accounts appear in its financial statements. That
means that balance sheet accounts, assets, liabilities, and shareholders' equity are listed first,
followed by accounts in the income statement  revenues and expenses.

Assets Account:

 Cash
 Savings account
 Petty cash balance
 Accounts receivable
 Undeposited funds
 Inventory assets
 Prepaid insurance
 Vehicles
 Buildings

Liabilities Account:

 Accrued liabilities
 Accounts payable
 Payroll liabilities
 Notes payable
Shareholders Equity Accounts:

 Common stock
 Preferred stock
 Retained earnings

Chart Of Accounts Sample:

The Balance Sheet Accounts:

We call these the “balance sheet” accounts because we need them to create a balance
sheet for your business, which is one of the most commonly used financial statements. There
are three kinds of balance sheet accounts:

Asset accounts:

Record any resources your company owns that provide value to your company. They can be
physical assets like land, equipment and cash, or intangible things like patents, trademarks
and software.

Liability accounts 

Are a record of all the debts your company owes. Liability accounts usually have the word
“payable” in their name—accounts payable, wages payable, invoices payable. “Unearned
revenues” are another kind of liability account—usually cash payments that your company
has received before services are delivered.

Equity accounts 

Are a little more abstract. They represent what’s left of the business after you subtract all
your company’s liabilities from its assets. They basically measure how valuable the company
is to its owner or shareholders.

The Income Statement Accounts

We use the income statement accounts to generate the other major kind of financial
statement: the income statement.

Revenue accounts 

Keep track of any income your business brings in from the sale of goods, services or rent.

Expense accounts 

Are all of the money and resources you spend in the process of generating revenues, i.e.
utilities, wages and rent.
The way that the balance sheet and income statement accounts interact with each other is
complex, but one general rule to remember is this: revenues increase your company’s equity
and asset accounts, while expenses decrease your assets and equity.