Chapter 2: Charting Your Accounts Flashcards
Chart of Accounts
Is the road map that a business creates to organize its financial transactions.
It’s a list of all the accounts a business has, organized in a specific order; each account has a description that includes the type of account and the types of transactions that should be entered into that account.
The organization and structure are designed around two key financial reports. Which one?
The balance sheet and the income statement.
Balance sheet: shows what your business owns (assets) and who has claims on those assets ( liabilities & equity).
Income statement: shows how much money your business took in from sales an how much money it spent to generate those sales.
Balance sheet accounts include:
Current assets
Accounts that track what the company owns and expects to use in the next 12 months, such as cash, accounts receivable (money collected from customers), and inventory
Long-term assets
Accounts that track what assets the company owns that have a life span of more than 12 months, such as buildings, furniture, and equipment
Current liabilities
Accounts that track debts the company must pay over the next 12 months, such as accounts payable (bills from vendors, contractors, and consultants), interest payable, and credit cards payable
Long-term liabilities
Accounts that track debts the company must pay over a period of time longer than the next 12 months, such as mortgages payable and bonds payable
Equity
Accounts that track the owners’ claims against the company’s net assets, which includes any money invested in the company, any money taken out of the company, and any earnings that have been reinvested in the company
How the chart is filled?
- Balance sheet accounts
- Income statement accounts
Income statement accounts include:
Revenue
Accounts that track sales of goods and services as well as revenue generated for the company by other means
** Cost of goods sold**
Accounts that track the direct costs involved in selling the company’s goods or services
Expenses
Accounts that track expenses related to running the business that aren’t directly tied to the sale of individual products or services
Sales of goods
The revenues earned when a company sells its goods, products, merchandise, etc.
The chart of accounts usually includes at least three columns
Accounts
Lists the account names
Type
Lists the type of account, such as asset, liability, equity, revenue, cost of goods sold, or expense
Description
Contains a description of the type of transaction that should be recorded in the account
