Have you ever tried creating your own chart of accounts? Did you ever feel lost in the middle of it? If you’ve experienced  either one of this, don’t freak out and give up. Just sit back, relax and organize your thoughts on this.

A chart of account is essential in any bookkeeping system. It is the backbone of the financial statements because an incorrectly set up chart of accounts will result in an incorrect financial report.

A chart of accounts is a list of account titles or account codes with account titles. These account titles or account names are used to record the financial transactions which are summarized in the general ledger which then produces the financial statements.

Before you start, you must have the type of business in your mind. Some bookkeeping software, like Quickbooks can tailor fit the chart of accounts with the type that your business belongs. You have to think of also of what accounts that you need to track and those that will not be useful to you. So if you just copy a chart of accounts from other business that has the same type as yours, or you just use the chart of accounts tailor fit by your bookkeeping software, you might as well remove those items that you will not need in the future.  This will make your chart of accounts, general ledger, trial balance and financial statements look neat.  Fewer accounts also lead to fewer entry mistakes and less confusion in recording.

For large companies, it is necessary to use number codes before the account names for easier categorization while it may be unnecessary to use number codes if there are only few account titles to use and this is true with most small businesses.   Whatever you choose, you must think of the future. How do you foresee the number of your account titles in the future? If you see that it will increase in such a way that you think you should have used the numbering system at the onset, then you may do so at the very start.

Usually, there are seven categories of accounts for numbering. These are as follows:

1000 – Assets

2000- Liabilities

3000 – Equity

4000 – Revenue

5000 – Cost of Goods Sold

6000 - Expenses

7000 – Other Income

8000 – Other Expenses

Again, think of the future when using the number coding. For example, instead of using 1001,1002 and so on for sub accounts of assets such as cash and accounts receivables, you may want to use 1010 for Cash,  1020 for Accounts Receivables because you may have more than one type of sub accounts for cash, for accounts receivables, and so with other accounts.

Creating a chart of accounts for the first time may be time consuming and may seem daunting but you must have a lot of patience to carefully plan and prepare it if you want to make your financial reports accurate and avoid messing up your tax return.

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