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chapter two of six

How to set up a chart of accounts


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Accountant & bookkeeper guides > How to do bookkeeping > How to set up a chart of accounts

If you’re stepping up to do the bookkeeping in a new business, you may have to set up the chart of accounts. Done right, it will make all your other jobs so much easier.

What is the chart of accounts?

The chart of accounts sits just under the five main accounts in the general ledger. You can learn more about the main accounts in our chapter on double-entry bookkeeping.

chart of accounts

Figure 1, The five main accounts that make up a general ledger.

A business can create as many sub-accounts as it needs to categorize its transactions. However there are some standard accounts that are typically used across most businesses.

What is the purpose of a chart of accounts?

A chart of accounts groups together transactions of a certain type. This allows you to produce detailed reports into specific areas of the business and its finances.

Standard chart of accounts

A standard chart might look like this:

assets

Liabilities may be organized into current liabilities and non-current liabilities. Current liabilities are amounts owed in the current year. Non-current liabilities are amounts owed next year and beyond.

tables-3-4-5

How is a chart of accounts used in accounting software?

The five core accounts are part of any accounting software and they’re the same for every business. The categories that sit beneath them in the chart of accounts can be customized to suit your business. For example, you might create several accounts for sales revenue – one for each region you trade in, or one for each department of your business.

When you enter a transaction into your software, it may ask you where to record the opposing credit or debit. Or you can teach the software where to make the opposing entry and it will happen automatically.


Chapter 3: How to do bookkeeping data entry

Good bookkeeping starts with good data entry. Learn what information you need to record, and find out how modern bookkeepers get the job done.

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