An “account” is where you’d record all the transactions relating to a company’s assets, liabilities, owner’s equity, revenue and expenses. Each of these accounts can be divided into sub accounts to show these transactions in whatever level of detail you wish.
All the accounts together are part of the “general ledger.” How the general ledger is broken into individual accounts is referred to as the “Chart of Accounts.”
The five main categories of the Chart of Accounts that appear on your financial statements are:
Balance Sheet – Assets, Liabilites, Owners Equity
Income Statement (P&L) – Revenue, Expenses
Your accountant uses a numbering system for these accounts, but the account numbers typically do not appear on your Income Statement or Balance Sheet. For example, Assets are any account beginning with a 1. Liabilites are accounts beginning with a 2. Owner’s Equity accounts begin with a 3. Revenue accounts begin with a 4, and expense accounts begin with a 5, 6, 7, etc.
Your chart of accounts can be expanded to show what you want, or simplified by collapsing accounts together.
For example, your Asset accounts on your Balance Sheet may be –
Assets
Current Assets
Cash
Petty Cash
Accounts Receivable
Notes Receivable
Inventory
Prepaid Insurance
Prepaid Deposits
Prepaid Other
Fixed Assets
Buildings
Machinery and Equipment
Vehicles
Computer Equipment
Furniture and Fixtures
Accumulated Depreciation
So let’s say you’re looking at your financials and you see that you never have any “Notes receivable.” To make your financials simpler, you may ask your accountant to get rid of that account.
Let’s say you also notice the “Pre-Paid Other” has something in it but you don’t know what it is. Ask. Say you find out it’s mostly rent, but occasionally she has something else in there too. You may ask your accountant to name an account “Pre-Paid Rent” so you can see that each month, and still have the “Other” account for miscellaneous.
Let’s say you see a lot of assets under vehicles. You want to see more detail so you ask for two accounts – one for trucks and one for cars.
You see, you can and should make the chart of accounts work for you. Make it show you what you want to see, but not so many accounts for every little thing that it gets too complicated. Your call!
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