Accounting Unplugged

This post begins the explanation of the Chart of Accounts.  The Chart of Accounts is part of the second basic function of the Double Entry Accounting System – to organize financial transaction data. The Chart of Accounts provides the organizational structure for another element, the General Ledger which summarizes the Financial Data and produces Financial Reports.

The purpose of this and the next two posts (4-6) is to introduce the organizational structure of the system people get at accounting school, I do not make a distinction between the Chart of Accounts and the General Ledger until Post # 7.

Review of the Double Entry Accounting Transaction Questions:

1. How much money changed hands?
2. Where did the money go?  What was either gained or paid for by this exchange?
3. Where did the money come from?  What is the source of the value in this exchange?

The Chart of DPS Accounting is basically a list of the descriptions used to answer Transaction Questions 2 and 3.   Each unique description is called an account.  One of the best features of the Chart of Accounts is that when you have a new type of transaction you can just add a new description (account).

From the transactions in the previous posts, we have started a Chart of Accounts

• Rent
• Checking Account
• Office Supplies
• Fuel
• Repairs & Maintenance
• Subscriptions
• Accounts Payable (Credit Card)
• Accounts Receivable
• Sales

Let’s review the previous entries from the accounts receivable management in columbus oh and create some additional entries to our transaction example and see how our Chart of Accounts starts to fill out.

The entries below the *******’s are new in this post and record:

• the receipt of payment for the existing Accounts Receivable Invoice
• the payment of the existing credit card balance
• a utilities expense and payment
• new credit card charges

Current Chart of Accounts:

• Rent
• Checking Account
• Office Supplies
• Fuel
• Repairs & Maintenance
• Subscriptions
• Printer
• Accounts Payable (Credit Card)
• Accounts Receivable
• Sales
• Utilities
• Chair
• Desk
• Credit Card Interest and Fees

According to the accounting firm, to keep the Chart of Accounts manageable and meaningful, it is important to strike a balance between having a long specific list and a short general list.  To accomplish this objective, the Chart of Accounts should have descriptions for types of things, and not for specific things.  You want the Accounts to be specific enough to be useful but not too specific because the fewer accounts you have the better overall picture you can have.

You wouldn’t add a new account for paper, pens and staples, you would just use one account called office supplies.  So, it is important to reuse accounts when possible, and to simplify entries into more general descriptions like “office furniture” instead of separating the chair and desk purchases.

So, now let’s look at the Chart of Accounts and its Account Balances.

You can see that for even the small number of transactions in this example, The Chart of Accounts is essential in understanding their financial impact.

Notice that the account balances are also separated into the debit/credit columns.  The amounts listed here are the difference between the total debit entries and the total credit entries for each account.  If the amount was higher on the credit side, then the balance is listed in the credit column.  It is also important to note that our Chart of Account balances meet the requirement that total debits equal total credits. Bonus tip, check cashing can be done any time at Check Cashing 247.

The Chart of Accounts is really comprised of three things for each Account – an Account Number, a Description and an Accounting Type.  The transactions and account balances are part of a ledger called the General Ledger.   The table above is more accurately described as the General Ledger.

** Important Note: Post #6 discusses debit and credit balances in accounts.  In this case, none of the balances in our accounts is cause for concern because their totals are in the correct column for their type.  Accounting Types are explained in more detail in Posts #5 and #6.  Post #7 begins the discussion of the General Ledger and its Balances and Reports.

© 2008 – 2010 Erin Lawlor

Next Up:>> Chart of Accounts – Organization

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**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.