What is a Chart of Accounts?

Charts of accounts are essentially a listing of the various categories for income and expenses associated with the finances of an organization. While the exact configuration of the line items on a chart of accounts may vary slightly from one entity to another, there are a few basic categories that will be found in just about every accounting ledger. Additional categories may reflect the nature of the business conducted by the organization, such as charitable funds set aside for specific purposes, or assets that are set aside for the an expansion project associated with the company.

The core group of categories that are found in a chart of accounts are not unlike those found in just about every household budget. These would include such line items as rent or mortgage balances and payments, basic utilities, and any ongoing debt that is paid on each month, such as credit card balances. The exact order of these categories may be further defined by the establishment of a series of line items, or by following a general ledger approach and include some items under broad categories. As an example, it may be helpful to structure the chart of accounts so that the line items of electricity, water, and telephone services are all grouped under the category of Utilities, rather than appearing as stand alone categories.

Along with the basic categories included in a chart of accounts, there are often designations that are unique to the specific entity. Non profit organizations may utilize line items that allow for the recording of membership dues, revenue generated from fund raising activity, or collections that are to be applied to a specific project fund. With companies, the chart of accounts will always involve Receivables as well as Payables as part of the structure. There is often also categories that allow for the orderly tracking of discretionary funds assigned to a specific department or for general use by a location of the company.

Many organizations choose to use a system of accounts that calls for the creation of both an alpha and a numeric designation for each category reflected on the chart of accounts. If there are sub-categories residing under main categories, this is usually taken into consideration when setting up the numbering sequence used in the ledgers. These same designations will also appear as line items on both the balance sheet and the income statement for the organization. By following this process, it is very easy to cross reference transactions and ensure the financial records remain properly balanced.