A company's bookkeeping system is based on its general ledger chart of accounts. The chart of accounts essentially serves as a roadmap for the bookkeeper and accountant in the business firm. The chart of accounts makes it easier for the company to record accounting transactions consistently and properly, which helps the firm develop its financial statements at the end of the accounting cycle.
Asset accounts are on a company's balance sheet, along with liability accounts and owners' equity accounts. The asset accounts help accountants keep track of all the money coming into the firm, as well as tracking all of the items it owns of any value, from stock investments to buildings, and from company cars, computer, and office supplies to the company-bought artwork on the walls.
The Order of the Chart of Accounts
The accounts on the chart of accounts go in the order of the items on the balance sheet and income statement. After asset accounts, the chart of accounts would include liability accounts and owners' equity accounts. Next would be the revenue and expense accounts that make up the income statement.
If you're designing a chart of accounts for a new company, you would typically start with just a handful of necessary accounts, leaving gaps in the numbering so that you can add more accounts into each section in the future, as the company grows.
The basic account structure is fairly standard, meaning that you'll find it in just about any company's chart of accounts. The standardization comes from the fact that many companies prepare their financial statements in accordance with generally accepted accounting principles (GAAP), and these principles dictate the order in which financial statement items must be recorded and reported.
What the Numbers Mean
Each account in the company's chart of accounts is created with a three- to five-digit number followed by the account name.
The first digit of the number signifies if it is an asset, liability, or another type of account. For example, if the first digit is a "1" it is an asset account, such as cash, and if the first digit is a "3" it is a revenue account.
The chart of accounts is organized by the order of each account's appearance in the financial statements, starting with the balance sheet and continuing with the income statement.
The Chart of Accounts Categories
The first category on the chart of accounts consists of the asset accounts. A business firm needs to personalize its chart of accounts to some degree, to make sure it includes all accounts relevant to the specific business. For example, certain accounts appear in every company's chart of accounts, such as Cash or Accounts Receivable.
Each business is structured differently, however, and when creating your asset accounts, think about all the things your business owns and expects to own during the coming year.
Companies usually have two basic account groups for assets on their chart of accounts: current assets and long-term assets.
Current asset accounts track the balance of any assets that a company will likely consume, sell, or otherwise exhaust through its normal business operations, within the next 12 months or before the end of its current fiscal year. The current asset category includes accounts such as:
- Cash: All companies have a Cash account. You can list just this one account in the Chart of Accounts. Alternatively, you can break down your Cash account into Cash in Checking and Cash in Savings. If you have the cash for other purposes, then personalize this category in whatever way you like. Petty Cash can also be listed here.
- Accounts Receivable: If you offer your customers store credit, the total amount of store credit outstanding is noted here.
- Inventory: If your company sells products, the value of your company's inventory is stated here. That value can be stated in terms of LIFO or FIFO inventory accounting.
- Prepaid Expenses: This account records expenses that have already been paid, but not used up. For example, insurance is paid at the beginning of the month and gets used up over the 30-day period.
Long-term assets also go by the name noncurrent assets, because they're typically on the balance sheet for longer than one year. Long-term assets, such as machinery, are recorded at their cost, then depreciated in annual installments until the asset has little or no remaining recorded value. Because of this accounting treatment, the asset's value on the balance sheet may not reflect its current or market value. Long-term asset accounts include the following:
- Furniture and Fixtures: This account is for recording the cost of desks, chairs, bookcases, shelving, and other office furniture. These items will be depreciated over their useful lives.
- Plant and Equipment: Most companies have an account for Plant and Equipment. This category includes the cost of buildings, land, and any equipment that you may have acquired to produce your product.
- Accumulated Depreciation: The plant and equipment account, as well as other long-term asset accounts, will have an Accumulated Depreciation account shown with it in order for you to be able to keep track of how much of the value of that asset has been used up. This is a unique account, as it's actually a contra-asset account, not a liability account. Even though it has a normal credit balance whereas other asset accounts have a normal debit balance, Accumulated Depreciation is designed to be offset against other asset accounts, so it belongs in the asset section of the balance sheet.
Other types of long-term asset accounts include accounts for vehicles, office furniture and fixtures, and any leases your company may have.
Depending on the type of business you own, you may have more or fewer current and long-term assets.