How to Set Up a Chart of Accounts

How to Set Up a Chart of Accounts

Learn how to properly set up a chart of accounts for your business with this step-by-step guide on categorization, naming conventions, and numbering.

A chart of accounts is a complete listing of all financial accounts for a specific business. It is important to create this list in a logical and highly organized manner. While it can be tedious at first, regular updates will make the process easier and faster, allowing you to monitor and manage all your financial transactions more efficiently. Read on to learn how to set it up properly.

1. Categorize all your business finances into the five primary classifications found in financial statements:

• Assets: All tangible and intangible items of value used for business operations and investment activities.
• Liabilities: Everything your company owes to others, such as creditors, banks, and taxes.
• Equity: What the company owes the owner after all liabilities have been fully paid.
• Revenues: The financial gains of the business.
• Expenses: All the costs incurred by the company to generate income.

For a more detailed explanation of each account type, you can visit the Balance Sheet Tutorial website.

2. Next, designate unique names for the subcategories within each account type. This allows you to consolidate amounts into specific subcategories, preventing clutter on a single page. Standard naming conventions already exist for each classification. Please see below:

• Assets: You can divide your assets into three categories: current (intangible), fixed (tangible), and other (non-current). Under current assets, you can label accounts as Accounts Receivable, Petty Cash, Cash on Hand, Regular Checking Account, Payroll Checking Account, Savings Account, etc. For fixed assets, you can use names like Furniture and Fixtures, Equipment, Vehicles, Buildings, Land, etc. Other assets include Deposits, Organization Costs, etc.
• Liabilities: This account is divided into current and long-term types. You can label current liabilities as Accounts Payable, Accrued Expenses, Wages Payable, 401(k) Deductions Payable, Health Insurance Payable, etc. For long-term liabilities, you can include Notes Payable, Land Payable, Equipment Payable, Bank Loans Payable, etc.
• Equity: Stated Capital, Capital Surplus, Retained Earnings.
• Revenues: Interest Income, Finance Charge Income, Shipping Charges Reimbursed, Sales Returns and Allowances, etc.
• Expenses: Advertising Expense, Auto Expense, Bank Fees, Cash Over and Short, Bad Debt Expense, etc.

These are just a few examples of unique category names you can use. For more detailed examples, you can check the Chart of Accounts website.

3. You are almost done. Start assigning reference numbers to all your accounts. This will make it faster and easier for everyone to find the specific amounts they are looking for. For smaller businesses, three-digit numbers are sufficient; for larger companies, you can use four-digit numbers. Here are some examples:

• 100 - 199: Assets (100 - Petty Cash, 101 - Cash on Hand)
• 200 - 299: Liabilities (200 - Accounts Payable, 201 - Accrued Expenses)
• 300 - 399: Equity (300 - Stated Capital, 301 - Capital Surplus)

It is fine if you do not use all the assigned numbers for each account; they may come in handy in the future.

4. Finally, input the amounts you segregated in the first step, and you have successfully created your own chart of accounts.

This process simplifies your financial reports and responsibilities while making historical comparisons of each account clear and easy to understand. It will also help prevent errors that could harm your business in the long run. Follow these steps carefully to achieve these benefits and manage your business effectively. Good luck!