Charts of Accounts

Charts of Accounts

Charts of account are a list of accounts. Some organization simply maintains the list of all head of account, while other organization uses unique code with the description. Typically the list of account or charts of account is maintained as follow

Code	Head	Nature
1000	Equity	Equity
1001	Share capital	Equity
2000	Assets
2001	Plant	Asset
2002	Furniture	Assets
3000	Liabilities	Liabilities
3001	Trade payable	Liabilities
3002	Accrued expenses	Liabilities
4000	Cost of sales	Cost of Sales
4001	Purchases	Cost of Sales
4002	Freight	Cost of Sales
5000	Expenses
5001	Salary	Expense
5002	Rent	Expense
6000
6001	Sales	income
6002	Other income	Income

It is important to note that there is no standard structure for charts of account and each organization develop account structure according to its own requirements.

1.   Unique Number:

In charts of accounts each head of account is given a unique number. This unique number is very important to record the transaction accurately. It is important to note that unique number is more relevant in computerized environment. For example Accountant knows that expenses code starts from 6000; therefore there is little chance that expense will be recorded as asset.

2.   Distinguish:

Charts of account code distinguish the different nature of accounts. These have been briefly explained below with a structure. Each nature of account has different code like equity start with 1000, asset with 2000, liabilities 3000.

3.   Consistency & Standardization:

Charts of accounts or charts of account coding bring consistency and standardization. Accountant has a structured list of all possible head of account and need to record the transactions in these heads.

4.   Accurate Recording:

Charts of account codes also play important role in accurate recording of financial transactions. The possibility of recording sales into salary is low in case of effective charts accounts.

5.   Structure of Charts of Accounts.

Charts of account are maintained in a structured way.

1000- Equity.

2000- Assets.

3000- Liabilities.

4000- Cost of Sales.

5000- Expenses.

6000- Incomes

7000- Other income

6.   Flexibility

A good chart of account must be flexible. This is more relevant, when codes are in charts of accounts. Thus we can say that it is codes of charts accounts must be flexible.

5000- Expenses

5001-Salaries

5002-Rent

5003-Repairs

7.   Segment Reporting:

Charts of accounts may be used generate segment reporting like area wise reports or project wise reports.

500101-Salary in London

500102-Salary in New York

500103-Salary in Japan

8.   Reporting & Analyses:

Charts of account facilitate financial statement preparation and analyses. The structure charts of account can be analyzed by the management.