The Chart of Accounts

When a company is formed, the accountant will produce the chart of accounts. In its most basic terms the chart of accounts is a listing of all a company's accounts with a corresponding number assigned to it.

These numbers are not randomly assigned to the accounts of a business. In most cases the numbers are assigned in order that they appear on the financial statements beginning with the balance sheet and then moving to the income statement accounts.

This is seemingly a basic and elementary task. However, most companies expect and plan to grow at some point in the future. Therefore, the accountant must ensure that the books posess the ablity to grow along with the company's growth (i.e. the ability to add additional accounts as needed).



For example, if a company begins by numbering their accounts with 1 and preceding forward it would look something like this:
01 - Cash
02 - Inventory
03 - Marketable Securities
04 - Accounts Receivable
05 - Supplies
10 - Accounts Payable
11 - Rent Payable
12 - Current Portion of Long-term Debt
13 - Salaries Payable
14 - Utilities Payable
15 - Taxes Payable
20 - Retained Earnings
21 - Common Stock
30 - Sales Revenue
31 - Service Revenue
40 - Utilities Expense
41 - Salaries Expense
42 - Rent Expense

What you are likely to notice is that when we begin a different category of accounts we start with a different first number in the series. This is very important. Notice that in the assets and liabilities accounts we are able to add only 4 more assets (06-09) and liabilities (16-19) to our business before we run out of potential account numbers in those series'. This does not leave a lot of room for our company to grow.

Most companies start numbering their assets in the thousands or tens of thousands. Choosing this form of numbering for their chart of accounts typically leaves plenty of room for most any company to add accounts and in addition leaves room for subsidiary accounts if needed.