What is a chart of accounts?

Definition

A chart of accounts is the menu of account names and numbers a set of books may use. It is the list, not the activity that later sits in those names.

Cash, accounts receivable, bread sales, and rent each get a name and a number. You cannot post to a line that is not on the list.

Where it shows up

Balance Sheet: Related to the asset, liability, and equity accounts on the list.

P&L: Related to the income and expense accounts on the list.

Cash flow: Related to the cash accounts on the list.

See also: General Ledger · Account Number · Account Roll-Up

When you look at the Balance Sheet, the asset, liability, and equity lines are names from this list. Cash and accounts receivable sit there because they were set up as accounts first.

The Income Statement is the same for income and expense. Bread sales and rent appear because those names are on the list.

The Statement of Cash Flows uses the cash accounts from the same list. It does not invent a separate cash name.

If you open the software, the chart is the setup screen of account names and numbers. The ledger is the later activity posted into those names.

How it works

Someone builds the list before the first posting. Each account gets a type, such as asset, liability, equity, income, or expense, and a number that keeps similar accounts together.

Numbers are a filing system. Many shops put assets in the 1000s, liabilities in the 2000s, equity in the 3000s, income in the 4000s, and expenses in the 5000s.

You post only to a name that exists. If Maya needs a new "workshop rent" line, she adds it to the chart first, then posts to it.

Too many names make the books noisy. Too few names hide what the shop actually spends.

An account roll-up is how detail names add into a statement line. Cafe receivable and wholesale receivable can both live on the chart and still print as one receivables total.

A chart of accounts mapping is a different job. Mapping points one system's names to another system's names when two charts must report together.

Department splits can sit beside the chart, not instead of it. Rent is still rent, even if you also tag it to the cafe or the workshop.

Changing a name later does not rewrite history by itself. Old postings stay on the old account until you move them.

Example

Maya's florist list starts with cash, accounts receivable, bread sales, and rent. Those four names are enough to open the books.

A cafe invoice for $400 posts to accounts receivable and bread sales because both names are on the list. A bakery vendor bill for $1,200 posts to accounts payable and bread cost the same way.

When she adds a second location, she adds "workshop rent" as a new expense account. The next landlord bill can hit that name instead of mixing both shops in one rent total.

If she never adds the name, every rent bill lands in the original rent account. The statements still balance, and she cannot see which shop cost more.

Month end still prints from this list. Accounts that were never used show a zero, and accounts that were used show their balances.

Common mix-ups

The chart of accounts is not the general ledger. The chart is the allowed list of names and numbers.

The ledger is the activity and the balances inside those names. You need the list before you can post.

The chart of accounts is not an account number. The number is the code for one name on the list.

The chart is the full menu. The number is one slot.

The chart of accounts is not a departmental P&L. That report splits income and expense by location or product line.

The chart supplies the account names those splits still post to. One is the list, and the other is a cut of the same activity.

Do not copy a huge list from another business and never use half of it. Add a name when you have a real posting that needs its own line.

Related terms

• General Ledger: The master record of every account and every posted transaction.
• Account Number: The numeric code that places an account in the chart of accounts.
• Account Roll-Up: How detailed accounts summarize into the lines shown on a statement.
• Cost Center: A part of the business tracked for its spending rather than its profit.
• Trial Balance: A listing of every ledger account balance, used to check that debits equal credits.
• Chart Of Accounts Mapping: Aligning one account structure to another for reporting or system migration.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Departmental P&L: An income statement split by department, location, or product line.