Chart of Accounts Numbering
Chart of accounts numbering includes setting up a structure of accounts that an organization can use, and also assigning specific codes to general ledger accounts. A chart of accounts lists all accounts and is useful in aggregating information into financial statements. Usually, the chart is sorted in order by number to make it easier to locate specific accounts. Typically, the accounts are numeric, but they can also be listed alphanumerically.
Generally, the standard chart of accounts numbering lists items in order of their appearance in financial statements, beginning with the balance sheet, then the income statement. So, the chart starts with cash, then lists liabilities and shareholder’s equity, and proceeds to list accounts for expenses and revenues. Many organizations design their chart of accounts to ensure expense information is compiled by the department. In this case, the accounting department, the engineering department, and the sales department each have a similar set of expense accounts. The configuration of these accounts depends on the needs of the business.
Introduction to Chart of Accounts Numbering
The accounting chart of accounts numbering involves setting up different accounts and giving them a structure. This numbering system determines the processing and storage of financial information. The account number carries the following codes:
- Division Code: This is a two-digit code that identifies a division in an organization. The organizations with a single division would not typically need a division code, but the code can take three digits if there are more than 99 divisions within the organization.
- Department Code: This typically includes a two-digit code that highlights a specific department like marketing, production, or accounting within the company.
- Account Code: An account code is a three-digit code that describes account types like supplies expense, fixed assets, and transportation expense. The account code depends on the type of account.
The preferred code in the numbering chart of accounts depends on the complexity of the operations of an organization and the information the accounting manager wants to pull from the financial reporting system. Often, the codes are numeric but could also be listed following an alphanumeric format. This no-strict rule on the pattern works best as it ensures simplicity and is easier to feed into a normal keyboard.
Why Is the Chart of Accounts Numbering Important?
It’s a tedious task trying to keep track of the money moving in and out of your business, but this is an important process if you want to have insight into your cash flow. It also helps you have an overview of the financial health of your business or company. This is why any organization looking to establish market dominance needs to embrace at least the basic chart of accounts numbering. Chart of accounts numbering can be a great addition to your analytics tools.
The chart is vital for different reasons. First, it provides a clear picture of your business finances, which is useful for business owners and investors that don’t deal with the day-to-day operations of the business. Also, it makes it easy for the company to comply with financial reporting requirements. So, a chart of accounts numbering system is beneficial for all types of businesses.
Because the numbering system makes the identification process of accounts simpler, this makes it easier to control and analyze the costs of your business. A chart of accounts encourages the application of the consistency principle, which assists a company in comparing financial reports from different years. Another benefit is that the numbering makes it easier to manage accounts, so there is more accuracy and fewer chances of errors.
How to Create a Numbering System for a Chart of Accounts
The typical chart of accounts numbering encourages companies to list accounts in the order they are listed in the financial statements. First on the list is always the balance sheet account, which is followed by the income statement. However, some companies prefer to use a numbering system that ensures all departments use the same expense accounts. These are the accounts that get the numbering:
- Assets – Usually, assets fall into fixed and current ones. It’s easy to convert current assets into cash, like money market, checking accounts, account receivables, savings accounts, and so on. For current assets, most organizations use codes from 1000 to 1499, but there are no specific rules for this. On the other hand, fixed assets are assigned codes from 1500 to 1999.
- Liabilities – Funds the company owes to outsiders are liabilities. There are different types of liabilities, including non-current, current liabilities, and more. For example, you could create a payroll liability that tracks tax deductibles from employees, social security payments, and federal taxes.
- Income – This is the revenue the company generates from operations like sold products, fees, reimbursable expenses, etc.
- Cost of Goods Sold – This numbering category includes the cost of freight, raw materials, transportation, and so on.
What Is the Standard Chart of Accounts?
You’ll find two categories of the standard numbering for chart of accounts. These include the income statement accounts and the balance sheet. These categories include subcategories that make it easier to track revenue and spending.
- Balance Sheet Accounts – These primarily track three categories of accounts: owner’s equity, liabilities, and the business’s assets. Balances from these accounts are included in the annual balance sheet, but they’re not closed at the end of the year. The balances are carried over into the next period, as they’re considered real or permanent accounts.
- Income Statement Accounts – The income statement account records four categories of data, including operating expenses, operating revenues, non-operating revenues, and gains. A bigger business will require more income statement accounts because you need to budget and report across several brands, departments, and products. At the end of each accounting period, income statement accounts are closed. The balances are combined and the amount is moved to the equity account.
Example of Chart of Accounts Numbering
If you’re looking for inspiration for chart of accounts numbering, the following is a simple example of chart of accounts. The example includes the typical number of ranges used in each head.
Balance Sheet Accounts:
- Assets: 1000 – 1999
- Liabilities: 2000 – 2999
- Equity: 3000 – 3999
- Operating Revenues: 4000 – 4999
- Operating Expense: 5000 – 5999
- Overhead Expenses or Cost: 6000 – 6900
- Gains and Non-Operating Revenue: 7000 – 7999
A good accounting system simplifies operations and helps the business have a clear picture of its performance. It’s important to embrace a chart of accounts numbering system that makes it easier to store and retrieve information. Moreover, a good system helps in many ways, including making it easier to prepare statements of accounts, tracking expenses, revenues, and liabilities. Usually, accounts are listed in the order they appear in financial statements.