Every business needs a process to organize its financial transaction. The Chart of Accounts
lists all the accounts for a business organized in a specific order. Think of a chart of accounts as a file cabinet, with a file for each type of accounting information you want to track. For example, if you need to know how much money you spend on advertising, you’ll set up a file (an account in the chart of accounts) for Advertising Expense. Each account will have a description that includes the type of account and the types of transactions that should be entered into that account.
As every business is unique, they will have their own specific Chart of Accounts based on how the business is operated, so you’re unlikely to find two businesses with the exact same Chart of Accounts.
However, some basic organizational and structural characteristics are common to all Charts of Accounts and are designed around two key financial reports: the balance sheet,
which shows what your business owns and what it owes, and the income statement,
which shows how much money your business took in from sales and how much money it spent to generate those sales.
The balance sheet accounts in your Chart of Accounts should include: Current Assets, Long-term Assets, Current Liabilities, Long-term Liabilities and Equity.
Income statement accounts complete the remainder of your Chart of Accounts and should include: Revenue, Cost of Goods Sold, and Expenses.
An account list should be developed that makes the most sense for how you’re operating your business and the financial information you want to track. The Chart of Accounts is a money management tool that helps you track your business transactions, so set it up in a way that provides you with the financial information you need to make smart business decisions.