In contrast, the second part of your chart of accounts lists your income statement accounts, which are revenue and expenses.Įvery chart of accounts is structured this way, though you can add additional accounts or sub-accounts to better track transactions specific to your business type. The first part of your chart of accounts houses balance sheet accounts such as assets, liabilities, and equity. Expense accounts: Expenses are considered the cost of doing business.Revenue accounts: Revenue is the money earned from goods and services.Equity accounts: Equity represents ownership of the business.Liability accounts: Liabilities are anything that your business owes.Asset accounts: Assets are anything that your business owns.The chart of accounts contains five types of accounts: How does a chart of accounts work?Įvery time you deposit a payment, record a bill that needs to be paid next month, or send an invoice to a customer, it’s recorded in the general ledger using the accounts found in your chart of accounts. And it helps to ensure that the information you do retrieve, such as financial statements, gives an accurate representation of your business. When set up correctly, your chart of accounts can provide you with detailed information about your business. It will be different for each business type, with a manufacturing company using a separate chart of accounts than a service business or a nonprofit organization. The chart of accounts records every financial transaction that your company has made. The backbone of your entire business, the chart of accounts, is where all of your general ledger accounts reside. One of the first things you learn in accounting 101 is the importance of the chart of accounts. It’s necessary to manage the financial transactions that your business makes appropriately. The chart of accounts lists all the accounts found in your general ledger, including both temporary and permanent accounts. ![]() We’ll explain what a chart of accounts is and why it’s so vital. ![]() Setting up your chart of accounts properly is one of the most important things a business owner can do.
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