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What is a Chart of Accounts?

Posted by Kashoo Team on September 29, 2014 at 12:49 PM

When you're setting up an accounting system for your business, a chart of accounts is one of the very first things you'll need to take care of to get your bookkeeping started. Thankfully, with a great online accounting system, setting up your chart of accounts is easy to do, and soon you'll be well on your way to organizing your company's finances!

Before we get into what exactly you'll find in a chart of accounts, let's go a over a brief definition of what, exactly, a chart of accounts is and why it's so important. A chart of accounts is an organized list of all of the different types of accounts used by your business, including a description of the account and, in some cases, an account number.

The chart of accounts really is the backbone of your company's whole bookkeeping system. You can think of it like a big filing cabinet, where each individual file is one of your company's accounts, all nicely organized in such a way that you can easily manage and report key financial information about your business. You need this type of information to make smart decisions to grow your business as well as when sharing information about your company's financial standing with others, like shareholders and investors.

So, what types of accounts can you expect to find in a chart of accounts? For starters, we have all of the accounts that are also found on the balance sheet: assets, liabilities, and equity (owner's equity, or shareholders' equity in the case of a publicly-traded company). Then we have the accounts found on the income statement: your operating and non-operating revenues, and your operating and non-operating expenses. We'll cover the balance sheet in an upcoming blog post. In the meantime, you can learn more about assets and liabilities in our recent post, "What is an Accounting Transaction?"

What other types of accounts will be in your chart of accounts? Well, it all depends on the type of business you're running and what your accounting needs are. A good starting point to figure out which accounts you'll need to include in your chart of accounts is to take a look at the way the business itself is organized: what are the different areas or department within the company? Some typical examples would include marketing, HR, and sales, R&D. Each of these departments usually has its own account for the supplies it uses (supplies expense account), the salaries paid to its employees (salary expense account), etc.

We mentioned at the beginning of this post that the chart of accounts includes a description of each type of account listed. Part of this description may include whether or not each account is a debit account or credit account (i.e., whether the account will increase or decrease when debited or credited). (Not quite sure about the terms "debit" and "credit" and how they're applied in accounting? We've got you covered: "What is a debit and credit in accounting?")

Selecting the right accounting software can be extremely helpful when it comes to setting up your chart of accounts, as the list of accounts can be tailored to your particular business. And as your business expands and changes, your chart of accounts can be modified along with it: you can add new accounts, as well as getting rid of any that are no longer being used.

Learn more about setting up accounts in Kashoo over on our support page.

If you have any questions about setting up your own chart of accounts, or if you want to drop us a line with any other accounting questions, feel free to email us at answers@kashoo.com.

Topics: Accounting Basics