January 29, 2022

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Chart of Accounts: Meaning, Explanations, and Sample

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Accounts are different from accounting. While the account is a page in a ledger, accounting is a field of study of which accounts are a half a drop of water of it. In previous lessons, we dealt with the classification of accounts. However, in this lesson, the focus is on the chart of accounts.

Definition of a chart of accounts

A chart of accounts is a list of codes and accounts that are maintained by an entity.

Explanations of the Chart of accounts

From the definition of the chart of accounts, the following can be deduced.

A chart of accounts is kept by every entity. Every entity has a chart of accounts. Unless the business keeps proper accounting records or doesn’t have an accounting structure in place.

It is a list of codes. Unlike the classification of accounts, a chart of accounts contains codes or a numbering system that applied to each class of accounts. Distinct codes are set up for each account type.

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Revenue, for example, will be given unique code (say 1010000 to 1019999) for all revenue streams of the firm. These are totally different from inventory and other account classes of the business organization.

Also, it is a list of accounts. Each account class, which is mostly based on the accounting equation (Assets, Liabilities, and Capital) as well as revenue, expenses and non-cash classification are given a unique code in the chart of accounts. A list of the above classes of accounts is stated based on the current business transactions, events, and conditions.

Although the chart is a list of accounts, it is totally different from a trial balance. This is true! A chart of accounts shows all accounts maintained by a business, which does not include figures in money terms and some of such accounts may not be used routinely by the firm. However, a trial balance is the direct opposite of the aforementioned.

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Sample chart of accounts

Below is a table of a sample chart of accounts based on a trading firm. You will notice that each account name is under a particular account class. However, the class of accounts may or may not be used in setting up the codes. Furthermore, the financial statement (FS) to which each account relates is given. This is not necessary. The sample is only center on assets. However, by brainstoming, a business can easily organized it’s on chart of accounts.

Chart of Accounts: Meaning, Explanations, and Sample

Chart of accounts are easy to apply in either an ERP software, that is, software created to suite a particular organization or ready made accounting software (for example, Quickbook and Sage 50).

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