Which of the following account types are listed last within the chart of accounts?

What is the Chart of Accounts?

The chart of accounts is a listing of all accounts used in the general ledger of an organization. The chart is used by the accounting software to aggregate information into an entity's financial statements. The chart is usually sorted in order by account number, to ease the task of locating specific accounts. The accounts are usually numeric, but can also be alphabetic or alphanumeric. 

Accounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement. Thus, the chart of accounts begins with cash, proceeds through liabilities and shareholders' equity, and then continues with accounts for revenues and then expenses. Many organizations structure their chart of accounts so that expense information is separately compiled by department; thus, the sales department, engineering department, and accounting department all have the same set of expense accounts. The exact configuration of the chart of accounts will be based on the needs of the individual business.

Chart of Accounts Best Practices

It is of some importance to initially create a chart of accounts that is unlikely to change for several years, so that you can compare the results in the same account over a multi-year period. If you start with a small number of accounts and then gradually expand the number of accounts over time, it becomes increasingly difficult to obtain comparable financial information for more than the past year.

Another best practice is to not allow subsidiaries to change the standard chart of accounts without a very good reason, since having many versions in use makes it more difficult to consolidate the results of the business.

In addition, periodically review the account list to see if any accounts contain relatively immaterial amounts. If so, and if this information is not needed for special reports, shut down these accounts and roll the stored information into a larger account. Doing this periodically keeps the number of accounts down to a manageable level.

Sample Chart of Accounts

Typical accounts found in the chart of accounts are as follows:

Assets:

• Cash (main checking account)

• Cash (payroll account)

• Petty Cash

• Marketable Securities

• Accounts Receivable

• Allowance for Doubtful Accounts (contra account)

• Prepaid Expenses

• Inventory

• Fixed Assets

• Accumulated Depreciation (contra account)

• Other Assets

Liabilities:

• Accounts Payable

• Accrued Liabilities

• Taxes Payable

• Wages Payable

• Notes Payable

Stockholders' Equity:

• Common Stock

• Preferred Stock

• Retained Earnings

Revenue:

• Revenue

• Sales returns and allowances (contra account)

Expenses:

• Cost of Goods Sold

• Advertising Expense

• Bank Fees

• Depreciation Expense

• Payroll Tax Expense

• Rent Expense

• Supplies Expense

• Utilities Expense

• Wages Expense

• Other Expenses

Chart of Accounts Mapping

If you acquire another company, a key task is shifting the acquiree's chart of accounts into the parent company's chart of accounts, so that you can present consolidated financial results. This process is known as mapping the acquiree's information into the parent's chart of accounts.

What is the chart of accounts?

A chart of accounts is a list of all your company’s “accounts,” together in one place. It provides you with a birds eye view of every area of your business that spends or makes money. The main account types include Revenue, Expenses, Assets, Liabilities, and Equity.

Companies in different lines of business will have different looking charts of accounts. The chart of accounts for a major airline will have a lot more references to “aircraft parts” than your local cat cafe.

The chart of accounts should give anyone who is looking at it a rough idea of the nature of your business by listing all the accounts involved in your company’s day-to-day operations.

Chart of accounts sample

Here’s a sample chart of accounts list. This one is for a fictional business: Doris Orthodontics.

As you can see on the right, there are different financial statements that each account corresponds to: the balance sheet and the income statement. Here’s what that means.

The balance sheet accounts

We call these the “balance sheet” accounts because we need them to create a balance sheet for your business, which is one of the most commonly used financial statements. There are three kinds of balance sheet accounts:

Asset accounts record any resources your company owns that provide value to your company. They can be physical assets like land, equipment and cash, or intangible things like patents, trademarks and software.

Liability accounts are a record of all the debts your company owes. Liability accounts usually have the word “payable” in their name—accounts payable, wages payable, invoices payable. “Unearned revenues” are another kind of liability account—usually cash payments that your company has received before services are delivered.

Equity accounts are a little more abstract. They represent what’s left of the business after you subtract all your company’s liabilities from its assets. They basically measure how valuable the company is to its owner or shareholders.

The income statement accounts

We use the income statement accounts to generate the other major kind of financial statement: the income statement.

Revenue accounts keep track of any income your business brings in from the sale of goods, services or rent.

Expense accounts are all of the money and resources you spend in the process of generating revenues, i.e. utilities, wages and rent.

The way that the balance sheet and income statement accounts interact with each other is complex, but one general rule to remember is this: revenues increase your company’s equity and asset accounts, while expenses decrease your assets and equity.

A note on reference numbers

You’ll notice that each account in the chart of accounts for Doris Orthodontics also has a five-digit reference number preceding it. The first digit in the account number refers to which of the five major account categories an individual account belongs to—“1” for asset accounts, “2” for liability accounts, “3” for equity accounts, etc.

Back when we did everything on paper, you used to have to pick and organize these numbers yourself. But because most accounting software these days will generate these for you automatically, you don’t have to worry about selecting reference numbers.

Why is the chart of accounts important?

Unless you have the name of every single account in your books memorized, you need to have all of them laid out in front of you, like a map.

The chart of accounts is designed to be a map of your business and its various financial parts.

A well-designed chart of accounts should separate out all the company’s most important accounts, and make it easy to figure out which transactions get recorded in which account.

It should let you make better decisions, give you an accurate snapshot of your company’s financial health, and make it easier to follow financial reporting standards.

How to adjust your chart of accounts

The rules for making tweaks to your chart of accounts are simple: feel free to add accounts at any time of the year, but wait until the end of the year to delete old accounts. If you delete an account in the middle of the year, it might mess up your books.

Let’s say that in the middle of the year Doris realizes her orthodontics business is spending a lot more money on plaster, because her clumsy intern keeps getting the water to powder ratio wrong when mixing it.

Instead of recording it in the “Lab Supplies” expenses account, Doris might decide to create a new account for the plaster.

To do this, she would first add the new account—“Plaster”—to the chart of accounts.

She would then make an adjusting entry to move all of the plaster expenses she already had recorded in the “Lab Supplies” expenses account into the new “Plaster” expenses account.

If she had already spent $2,000 on plaster up to that point, the adjusting entry would look like this:

Note: Moving expenses for plaster from the Lab Supplies expenses account to the Plaster expenses account.

Futher reading: Debits and Credits: A Simple, Visual Guide

In what order are accounts listed in the chart of accounts?

What are the 5 main types in the chart of accounts?

Which type of account is listed first in the chart of accounts?

What are the 5 account titles?