Preparing A Chart of Accounts

Drawbacks of the General Journal Cannot provide concise, easily accessible information about the changes to a single account What is needed is a separate form, which summarizes all the changes to a single account Each account has its own form

The Account Form Contains the debit and credit components of the T Account Also includes Debt and Credit Balance columns These columns enable accountants to know the balance of the account at any point in time Known as the balance-ruled account form

The Account Form Account Name:Account No: Balance DatePost Ref. DebitCreditDebitCredit The Balance columns enable companies to keep a running balance of each separate account

The Chart of Accounts Ledger – a group of accounts General ledger – the ledger that contains all the accounts required to prepare financial statements Account Number – Each account is assigned a specific number, which provides some information about the account Numbering system depends on the size and the nature of the organizaiton

Assigning Account Numbers File Maintenance – the procedure for arranging accounts in a general ledger, assigning account numbers, and keeping records current TechKnow Consulting assigns accounts 3 digit numbers (ABC) The first number (A) corresponds to the general ledger division in which the account is located If A=1, then the account is an Asset 2=Liability, 3=Owner’s Equity, 4= Revenue, and 5=Expense

Assigning Account Numbers The last two digits (BC) indicate the location of each account with a general ledger division Accounts are number by 10’s (B0) “Space” is left between assigned account numbers, so that new accounts can be added

Assigning Account Numbers Assets are listed by order of their liquidity How readily they can be converted to cash Cash, A/R, Supplies, Prepaid Insurance A/R are ordered alphabetically using the first initial of a company customer and the first initial of the last name of an individual customer For example: Cash 110 A/R Stan Getz120 A/R Musicland130 Supplies140

Assigning Account Numbers All other items are listed alphabetically A/P follows the same ordering rules as A/R Alphabetized by the first initial of the last name of an individual vendor or the first initial of the name of company vendor For example: A/P Acme Supplies210 A/P Abby Lincoln220 Advertising Expense510 Misc. Expense520

Assigning New Account Numbers If an account is no longer needed, it is removed from the chart of accounts and the general ledger If a new expense account title falls alphabetically between two existing accounts the new account number is between the two account numbers For example: 510 Advertising Expense 515 Gasoline Expense 520 Insurance Expense

Assigning New Account Numbers When a new account is added at the end of a ledger division, the next number in the sequence of 10’s is used. For example: 550Supplies Expense 560Utilities Expense 570Water Expense

Opening an Account Each account has its own general ledger account An account is opened by writing the account title and account number on the heading of an account page

Account Name:Account No: Balance DatePost Ref. DebitCreditDebitCredit Opening A New Account Cash 110