If you acquire another company, a key task is shifting the acquiree's chart of accounts into the parent company's chart of accounts, so that you can present consolidated financial results. Sales returns and allowances (contra account) Typical accounts found in the chart of accounts are as follows:Īllowance for Doubtful Accounts (contra account)Īccumulated Depreciation (contra account) Doing this periodically keeps the number of accounts down to a manageable level. If so, and if this information is not needed for special reports, shut down these accounts and roll the stored information into a larger account. In addition, periodically review the account list to see if any accounts contain relatively immaterial amounts. If you start with a small number of accounts and then gradually expand the number of accounts over time, it becomes increasingly difficult to obtain comparable financial information for more than the past year.Īnother best practice is to not allow subsidiaries to change the standard chart of accounts without a very good reason, since having many versions in use makes it more difficult to consolidate the results of the business. It is of some importance to initially create a chart of accounts that is unlikely to change for several years, so that you can compare the results in the same account over a multi-year period. The exact configuration of the chart of accounts will be based on the needs of the individual business. Many organizations structure their chart of accounts so that expense information is separately compiled by department thus, the sales department, engineering department, and accounting department all have the same set of expense accounts. Thus, the chart of accounts begins with cash, proceeds through liabilities and shareholders' equity, and then continues with accounts for revenues and then expenses. The accounts are usually numeric, but can also be alphabetic or alphanumeric.Īccounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement. The chart is usually sorted in order by account number, to ease the task of locating specific accounts. The chart is used by the accounting software to aggregate information into an entity's financial statements. However, a common coding scheme is as follows:Īs a complete example of the preceding outline of numbering, a parent company assigns the "03" designator to one of its subsidiaries, the "07" designator to the engineering department, and "550" to the travel and entertainment expense.The chart of accounts is a listing of all accounts used in the general ledger of an organization.
A company can use any numbering system that it wants there is no mandated approach.
This is the three-digit coding referred to previously. Once the coding structure is set, the numbering of accounts can take place.
The code can be expanded to three digits if there are more than 99 subsidiaries.ĭepartment code - This is usually a two-digit code that identifies a specific department within a company, such as the accounting, engineering, or production departments.Īccount code - This is usually a three digit code that describes the account itself, such as fixed assets, revenue, or supplies expense.įor example, a multi-division company with several departments in each company would probably use chart of accounts numbering in this manner: xx-xx-xxxĪs another example, a single-division company with multiple departments could dispense with the first two digits, and instead uses the following numbering scheme: xx-xxxĪs a final example, a smaller business with no departments at all could just use the three digit code assigned to its accounts, which is: xxx Furthermore, the company chart of accounts is basically a filing system for categorizing all of a company’s accounts as well as classifying all transactions according to the accounts they affect. It is not used by a single-entity company. In accounting, a standard chart of accounts is a numbered list of the accounts that comprise a company’s general ledger. This is the layout of an account number, and involves the following components:ĭivision code - This is typically a two-digit code that identifies a specific company division within a multi-division company. The first type of numbering to determine for a chart of accounts involves their structure. The numbering system used is critical to the ways in which financial information is stored and manipulated.
How to Create a Numbering System for a Chart of AccountsĬhart of accounts numbering involves setting up the structure of the accounts to be used, as well as assigning specific codes to the different general ledger accounts.