Preparing A Chart of Accounts

1
Preparing A Chart of Accounts
2
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

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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

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The Account Form
Account Name Account Name Account Name Account Name Account Name Account No Account No
Balance Balance
Date Post Ref. Debit Credit Debit Credit

• The Balance columns enable companies to keep a
  running balance of each separate account

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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

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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 A1, then the account is an Asset
• 2Liability, 3Owners Equity, 4 Revenue, and
  5Expense

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Assigning Account Numbers

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

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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 Getz 120 A/R
  Musicland 130 Supplies 140

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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 Supplies 210 A/P Abby
  Lincoln 220 Advertising Expense 510 Misc.
  Expense 520

10
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

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Assigning New Account Numbers

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

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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

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Opening A New Account

• Cash

110
Account Name Account Name Account Name Account Name Account Name Account No Account No
Balance Balance
Date Post Ref. Debit Credit Debit Credit