Sunday, April 11, 2010

What is Chart of Accounts




The number of accounts maintained by a particular business is affected by the nature of its operation, its volume of business and the extent to which details are needed for taxing authorities, managerial decisions, credit purposes, etc. For example, one particular enterprise may have separate accounts for Management Salaries, Office Salaries, and Sales Salaries, while another may find it satisfactory to record all types of salaries in a single salary expense account.
In sofar as possible, the order of the accounts in the ledger should agree with the order of the items in the balance sheet and the profit and loss account. The accounts are numbered to permit indexing and also for use as posting references in the journal.

ACCOUNTS RELATING TO                      ACCOUNTS RELATING TO
       BALANCE SHEET                           PROFIT AND LOSS ACCOUNT 

1.         Assets                                                              4.         Income

11.       Cash                                                                41.       Sales
12.       Debtors
14.       Supplies                                                                       5.         Expenses
15.       Prepaid Rent                                                   
18.       Printing Equipment                                            51.       Wages
19.       Accumulated Depreciation                                52.       Supplies Expense
                                                                                     53.       Rent Expense
                                                                                     54.       Depreciation Expense
            2.         Liabilities                                              59.       Miscellaneous Expense
           
21.       Creditors
22.       Accrued Wages

3.                  Capital

31.       XYZ, Capital
32.       XYZ, Drawing
33.       Profit and Loss Summary


Chart of accounts for XYZ Printing Press

Although accounts in the ledger may be numbered consecutively as in the pages of a book, a flexible system of indexing is preferable. In the chart of accounts illustrated above each account number has two digits. The first digit indicates the major division of the ledger in which the account is placed. Accounts beginning with 1 represent assets; 2, liabilities; 3, capital; 4, income; and 5, expenses. The second digit indicates the position of the account within its division. A numbering system of this type has the advantage of permitting the later insertion of new accounts in their proper sequence without disturbing the other account number. For a large enterprise with a number of department or braches, it is not unusual for each account number to have four or more digits.

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