Bookkeeping: Classification of Accounts
Bookkeeping is used to determine how a business is performing financially. A bookkeeper must carefully record each business transaction into the right account. Bookkeepers use the Chart of Accounts to organize financial transactions of a business. This chart lists all of the accounts a business has, organized in a specific order under five main categories; assets, liabilities, equity, revenue and expenses. Each account has a description that includes the type of account and the types of transactions. Based on how a business operates, the specific accounts will vary.
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The Chart of Accounts
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The organization and structure of the Chart of Accounts is designed around two key financial reports: the balance sheet and the income statement.
The Balance Sheet Accounts
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The Chart of Accounts starts with the balance sheet accounts, which show what your business owns and what it owes. These accounts are divided under five main categories, listed below:
Current Assets: assets that can be converted to cash within one year or key assets to be used up within a year. Examples include cash in checking, cash in savings, cash on hand, accounts receivable and inventory.
Long-term Assets: assets that take more than a year to be converted into cash or assets expected to be used for more than one year. Examples include land, buildings, machinery, patents, copyrights and goodwill.
Current Liabilities: debts owed to creditors within one year. Examples include sales tax collected, accrued payroll taxes, and credit cards payable.
Long-term Liabilities: debts to be paid over a period longer than one year. Examples include bank loans and mortgages.
Owners' Equity: the money that remains when you subtract all liabilities from assets. Examples include common stocks and retained earnings.
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The Income Statement Accounts
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The remaining accounts are listed under the income statement accounts. The income statement accounts shows how much money your business took in from sales and how much money it spent to generate those sales. These accounts are divided under three main categories, listed below:
Revenue: Includes accounts that track sales of goods and services as well as other sources of revenue.
Cost of Goods Sold: the cost of selling the goods or services. Examples include freight charges, purchase returns, and cost of raw materials.
Expenses: costs of operating the businesses that are not directly tied to sales. Examples include advertising, bank service charges, equipment rental, insurance, legal fees, accounting, salaries and wages, supplies, travel and entertainment, telephone, utilities, vehicles, and miscellaneous expenses.
Example of a Chart of Account for Assets.
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1000 - ASSETS
1001 CURRENT ASSETS
1010 Cash in Bank Account XYZ
1030 Petty Cash
1050 Accounts Receivable
1060 Due from Employee Advance
1100 Inventory
1500 FIXED ASSETS
1510 Land
1520 Building
1530 Accumulated Depreciation - Building
1540 Vehicle #1
1550 Accumulated Depreciation - Vehicle #1
1560 Office Furniture
1570 Equipment
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References
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