What is the Chart of Accounts?

It is a listing of all the accounts where you will record the inputs and outputs of money. Consider an account as a bucket. You can pour money into a bucket and you can pour money out of a bucket.

This chart lists the accounts in this order:

  • Assets
  • Liabilities
  • Equity
  • Revenue
  • Expenses

And just like everything else on this planet, each account has a name AND a number.

The accounts begin with this sequence:

  • Assets begin with the number 1
  • Liabilities number 2
  • Equity number 3
  • Revenue number 4 and maybe 5, 6, 7, and 8 depending on the need for Revenue accounts
  • Expenses may be 5, 6, 7, 8, or 9 depending on the need for Expense accounts

As you can see, it’s a very logical process. If you see a Chart of Accounts designed by a recent accounting student, you will more than likely see the following Chart:

  • 101 Cash
  • 102 Accounts Receivable
  • 103 Prepaid Insurance
  • 104 Inventory
  • 105 Property Plant and Equipment

Why? Because that’s how textbooks show the account structure.

Now comes what could be a hair-splitting moment: you have to divide the assets and liabilities into either “Current” or “Non-Current” types.

A “Current” Asset type is one that is expected to be converted into Cash within a year’s time, and for “Current” Liabilities, they are expected to be paid within a year’s time.

You have to be specific at this point because a report called The Statement of Cash Flows will be constructed on the distinction of an account being either a Current or Non-Current Asset or Liability.

If you want to be a nerd about this process, check out the property management tag on a company’s piece of equipment. The tag will state the company’s name and the Asset number which may begin with the number 1.

I have personally witnessed this. And it is nerdy to know this, but with respect to the number of people on this planet, I am part of an extremely small percentage who know and appreciate this fact. And now you are.

For best results, you should have your CPA guide you through this process because there are many cases where one account is directly connected to another account, and you have to appreciate this in order to have a successful setup.