Accounting has so many terms but one that leaves beginners confused is the chart of accounts. If you are left asking, what are the chart of accounts, then we’ll break it down and explain it. It’s a simple concept but an example certainly helps. Let’s dive into the chart of accounts.
What is The Chart of Accounts in Accounting?
The best way to think of the chart of accounts is to think of it as a table of contents. Generally, it is presented in excel as a list of all the accounts. We are going to go over an example of an account and then the chart of accounts should make sense.
What is an Account?
An account in accounting is a place to store transactions. A few examples of accounts include cash, inventory and accounts payable.
Looking at these three accounts, all of the individual transactions that increase or decrease cash would be stored and totaled up in a cash account. The same goes for inventory. You’d be able to see the total of all inventory transactions by looking at the inventory account.
Refresh Yourself:
What is the Basic Accounting Equation? Explained.
Accounting Chart of Accounts ( An Example for Beginners)
So we have defined a single account but what is a chart of accounts? As we mentioned, it is a list of accounts. It is like a bird’s eye picture of all the accounts in a business where you can store transactions. A chart of accounts may look like this:
| Account Number | Account Name | Account Type |
| 100100 | Cash | Asset |
| 100200 | Inventory | Asset |
| 200100 | Accounts Payable | Liability |
| 200200 | Lease Payable | Liability |
| 300000 | Retained earnings | Equity |
The accounts within the chart of accounts can be broken down into subaccounts as well. Here we have added additional sub-accounts to payroll liabilities. The chart of accounts would then look like this:
| Account Number | Account Name | Account Type |
| 100100 | Cash | Asset |
| 100200 | Inventory | Asset |
| 200100 | Accounts Payable | Liability |
| 200200 | Lease Payable | Liability |
| 200300 | Payroll Liabilities | Liability |
| 200300 | Payroll Liabilities:200310 – Social Security & Medicare | Liability |
| 200300 | Payroll Liabilities:200320 – State Withholding | Liability |
| 200200 | Lease Payable | Liability |
| 300000 | Retained earnings | Equity |
This would make it easier for an owner to track important items like state withholdings, which are a part of payroll liabilities.
Why is There a Chart of Accounts in Accounting Books?
Just like a table of contents in a book, the chart of accounts lets you see every account that is available to book new transactions into. While a chart of accounts usually doesn’t change too much when set up, it can have accounts added or deleted.
For example, if you want to add accounts receivable above, you could add it into an accounting system as 100300, Accounts Receivable, Asset.
Do All Businesses Have a Chart of Accounts?
All businesses that use excel or a professional accounting system should have a chart of accounts. When an auditor comes in, they may ask for the chart of accounts for their audit. It is one of the ways they can get a picture of all the accounts in the business.
If a business has accounting systems in place, you can be confident they have a chart of accounts.
Read More:
What is Double Entry Accounting? Gain an Understanding.
How is a Chart of Accounts Different from a Trial Balance?
While a chart of accounts and trial balance seem the same, there are some key points that make them different. A chart of accounts shows all the accounts while a trial balance is run at a point in time and equals zero since call accounts balance.
You may want a December 31 trial balance which would make up the financial statements but a chart of accounts would show all accounts. It wouldn’t be as consolidated as a trial balance.
Is a General Ledger Different from a Chart of Accounts?
A general ledger is different from a chart of accounts as well. A general ledger shows every individual transaction over the course of an accounting period. Remember that all these transactions roll up into accounts, which would be the accounts showing on the chart of accounts.
Simply, the general ledger shows all transactions.
A chart of accounts shows all accounts.
A Quick Recap on a Chart of Accounts
There you have it. A quick explanation of the chart of accounts. You have it all figured out right?
- A chart of accounts shows all the accounts for a business.
- It is not the same as a general ledger or trial balance.
- The chart of accounts will give you a birds-eye view of all the accounts, similar to a table of contents in a book.
Final Thoughts on What Is a Chart of Accounts in Accounting
It may take a bit of time to wrap your head around the chart of accounts but that’s okay. While you are still learning, you might want to take the time to brush up on other beginner resources too. Two areas to continue learning your accounting skills are the cash basis and accrual basis of accounting if you haven’t covered these yet. Keep learning and be sure to take notes along the way!
