To run a business smoothly, everything has to be organized. Finance and accounting are no different! A chart of accounts is a great example of how we keep things organized.
What is a Chart of Accounts
A chart of accounts is a list that categorizes all of your small business’s transactions. This list is typically structured inside of a table and has five separate types of accounts:
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
The chart of accounts is listed in numerical order and the first digit explains what type of account it is.
1XXX Assets
Assets are always listed first since they are the beginning of the accounting function and are typically denoted with the number 1. Assets that are listed in the chart of accounts are things such as cash, receivables, inventory, and equipment.
2XXX Liabilities
Liabilities are listed after assets and start with the number 2. Liabilities include debt your company owes such as equipment payments, lines of credit, and payroll liabilities.
3XXX Equity
Equity accounts follow liabilities and usually begin with the number 3. Equity is considered to be the value of a company and includes items such as retained earnings and owner’s equity.
4XXX Revenue
Revenue accounts are listed after equity and begin with the number 4. Revenue includes any type of income that has been generated from sales.
5XXX Expenses
The final accounts listed are expenses and are typically labeled with a 5. Expenses include any costs incurred to produce revenue. Examples include advertising, insurance, rent and any utilities paid.
Conclusion
A chart of accounts is a detailed list that provides insight into your organization’s financial health. Maintaining an up-to-date list requires practical decision-making and an understanding of basic accounting principles. If you could use some help cleaning up your business’s chart of accounts or with any other financial aspect for that matter, contact Still Water Financial Operations today. We provide online bookkeeping, virtual CFO, and business strategy services to small businesses all across the United States. Contact us today to learn more.