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The Chart of Accounts is the road map that a business creates to organize its financial transactions. After all, you can’t record a transaction until you know where to put it! Essentially, this chart is a list of all the accounts a business has, organized in a specific order; each account has a description that includes the type of account and the types of transactions that should be entered into that account. Every business creates its own Chart of Accounts based on how the business is operated, so you’re unlikely to find two businesses with the exact same Charts of Accounts.

However, some basic organizational and structural characteristics are common to all Charts of Accounts. The organization and structure 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. (You can find out more about balance sheets in Book II Chapter 4 and income statements in Book II Chapter 5.)

The Chart of Accounts starts with the balance sheet accounts, which include the following:

✔ Current Assets: Includes all accounts that track things the company owns and expects to use in the next 12 months, such as cash, accounts receivable (money collected from customers), and inventory

✔ Long-term Assets: Includes all accounts that track things the company owns that have a lifespan of more than 12 months, such as buildings, furniture, and equipment

✔ Current Liabilities: Includes all accounts that track debts the company must pay over the next 12 months, such as accounts payable (bills from vendors, contractors, and consultants), interest payable, and credit cards payable

✔ Long-term Liabilities: Includes all accounts that track debts the company must pay over a period of time longer than the next 12 months, such as mortgages payable and bonds payable

✔ Equity: Includes all accounts that track the owners of the company and their claims against the company’s assets, which include any money invested in the company, any money taken out of the company, and any earnings that have been reinvested in the company

The rest of the chart is filled with income statement accounts, which include

✔ Revenue: Includes all accounts that track sales of goods and services as well as revenue generated for the company by other means

✔ Cost of Goods Sold: Includes all accounts that track the direct costs involved in selling the company’s goods or services

✔ Expenses: Includes all accounts that track expenses related to running the business that aren’t directly tied to the sale of individual products or services

When developing the Chart of Accounts, you start by listing all the Asset accounts, the Liability accounts, the Equity accounts, the Revenue accounts, and finally, the Expense accounts. All these accounts come from two places: the balance sheet and the income statement.

This chapter reviews the key account types found in most businesses, but this list isn’t cast in stone. You should develop an account list that makes the most sense for how you operate your business and the financial information you want to track. As you explore the accounts that make up the Chart of Accounts, you’ll see how the structure may differ for different businesses.

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. You’ll probably tweak the accounts in your chart annually and, if necessary, you may add accounts during the year if you find something for which you want more detailed tracking. You can add accounts during the year, but it’s best not to delete accounts until the end of a 12-month reporting period. Book IV Chapter 6 discusses adding and deleting accounts from your books.