The Chart of Accounts – Included sample to download

The chart of accounts

The Chart of Accounts – Included sample to download

The chart of accounts defines how accounting information is stored. A properly structured chart of accounts makes it much easier to accumulate and report on information, so the account structure is an area of considerable interest to the bookkeeper. In this article, we give an overview of the chart of accounts and the most common accounts used, and then address the account coding structures for two types of organizations. We finish with a discussion of methods for reducing the complexity of the chart of accounts.

Overview of the Chart of Accounts

The chart of accounts is a listing of all accounts used in the general ledger, usually sorted in order by account number. The accounts are typically numeric, but can also be alphabetic or alphanumeric. The account numbering system is used by the accounting software to aggregate information into an entity’s financial statements.

Accounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement. Thus, the chart of accounts begins with cash, proceeds through liabilities and shareholders’ equity, and then continues with accounts for revenues and then expenses. Many organizations structure their chart of accounts so that expense information is separately compiled by different department. Such as the sales department, engineering department, and production department all have the same set of expense accounts.

Typical accounts found in the chart of accounts include:


• Cash. Contains the amounts of petty cash and bank account balances. There is usually a separate account for each bank account and a separate account for all petty cash.

• Marketable securities. Contains the valuations of any investments that the company has made in marketable securities. In a smaller business, excess funds may be kept in a savings account at the bank, in which case these funds appear in a cash account.

• Accounts receivable. Contains the balances of trade and non-trade receivables. Trade receivables are with customers, and non-trade receivables are with everyone else, such as employees. Trade receivables arise when sales are made on credit, with customers promising to pay as of a later date.

• Allowance for doubtful accounts. Contains a reserve against expected future losses on accounts receivable, which is in line with the Singapore Financial Reporting Standards (SFRS) 9. The account has a negative balance.

• Prepaid expenses. Contains the unconsumed balances of any payments made, such as prepaid rent and prepaid insurance.

• Inventory. Contains the balances of raw materials, work-in-process, and finished goods inventory.

• Fixed assets. Contains the amounts paid for fixed assets, such as machinery, furniture and fixtures, and computer equipment. This account may be subdivided into a separate account for each classification of fixed asset.

• Accumulated depreciation. Contains the grand total accumulation of depreciation charged against fixed assets over time. The account has a negative balance.

• Intangible assets. Contains the purchase costs of non-tangible assets, such as purchased patents, licenses, organization costs, and copyrights.

• Accumulated amortization. Contains the grand total accumulation of amortization charged against intangible assets over time. This concept is quite similar to accumulated depreciation. The account has a negative balance.

• Goodwill. Contains any excess amount paid to the owners of an acquired business that exceeds the fair value of the assets and liabilities acquired.

• Other assets. Contains all other assets that do not fit into the descriptions for the preceding asset accounts.

Note: Most of the preceding assets are considered to be current assets, which means that they will be liquidated within one year. If an asset is to be held longer than one year, it is considered a long-term asset, or non-current assets.


• Accounts payable. Contains the complete set of all payables owed to suppliers, based on invoices submitted by the suppliers.

• Accrued liabilities. Contains estimated liabilities for which no documented supplier invoices have yet been received.

• Taxes payable. Contains the liabilities for all types of taxes owed, including sales and use taxes, property taxes, payroll taxes, and income taxes. There is usually a separate account to track each of these types of taxes.

• Wages payable. Contains the estimated amount of wages owed to employees that have not yet been paid.

• Notes payable. Contains the remaining balances of loans owed to lenders. There may be a separate account for each loan owed, so that payments are not confused among the different loans.

Note: Most of the preceding liabilities are considered to be current liabilities, which means that they will be settled within one year. If a liability will not be paid for more than one year, it is considered a long-term liability, or non-current liability.

Stockholders’ Equity

• Share Capital. This account is used by corporations, which issue shares. It contains the amount of funds received by a business in exchange for the sale of its stock to investors.

• Additional paid-in capital. This account contains any additional amounts paid to the organization by an investor for shares in the business, which exceeds the par value of the shares.

• Retained earnings. Contains the accumulated amount of any earnings generated by a business.

• Drawing account. This account is associated with the capital account that was just referenced. It contains the amounts of funds withdrawn from the business by its owners.

• Other Comprehensive Income. This account can include the foreign exchange differences if the company deals with currencies other than its functional currency.


• Revenue. Contains the gross amount of all sales recognized during the reporting period.

• Sales returns and allowances. Contains the amount of any credits granted to customers for sales returns and allowances. This account balance offsets the revenue account.


• Cost of goods sold. Contains the cost of all direct labour, direct materials, and factory overhead associated with the sale of goods and services.

• Advertising expense. Contains the recognized cost of advertising expenditures.

• Bank fees. Contains the fees charged by a company’s bank to process transactions.

• Depreciation expense. Contains a depreciation charge that reflects the consumption of assets over time.

• Payroll tax expense. Contains the cost of all taxes associated with the payment of salaries and wages.

• Rent expense. Contains the cost of the rent associated with the facilities used by a business.

• Supplies expense. Contains the cost of all supplies consumed by a business.

• Utility expense. Contains the aggregated cost of all utilities, which may include water, heat, electricity, waste disposal, and so forth.

• Wages expense. Contains the cost of salaries and hourly wages incurred by a business to compensate its employees.

• Other expenses. Contains a variety of incidental expenses that are individually too small to warrant the use of a separate account.

There are a number of ways to structure the chart of accounts, as noted in the following sections that describe three-digit and five-digit charts of accounts.  

The Three-Digit Chart of Accounts

A three-digit chart of accounts allows a business to create a numerical sequence of accounts that can contain as many as 1,000 potential accounts. The three-digit format is most commonly used by small businesses that do not break out the results of any departments in their financial statements. A sample three-digit chart of accounts is shown below:

010 Cash

020 Petty cash

030 Accounts receivable

040 Allowance for doubtful accounts

050 Marketable securities

060 Raw materials inventory

070 Work-in-process inventory

080 Finished goods inventory

090 Reserve for obsolete inventory

100 Fixed assets – Computer equipment

110 Fixed assets – Computer software

120 Fixed assets – Furniture and fixtures

130 Fixed assets – Leasehold improvements

140 Fixed assets – Machinery

150 Accumulated depreciation – Computer equipment

160 Accumulated depreciation – Computer software

170 Accumulated depreciation – Furniture and fixtures

180 Accumulated depreciation – Leasehold improvements

190 Accumulated depreciation – Machinery

200 Other assets

300 Accounts payable

310 Accrued payroll liability

320 Accrued vacation liability

330 Accrued expenses liability – other

340 Unremitted sales taxes

350 Unremitted pension payments

360 Short-term notes payable

370 Other short-term liabilities

400 Long-term notes payable

500 Capital stock

510 Retained earnings

600 Revenue

700 Cost of goods sold – Materials

710 Cost of goods sold – Direct labor

720 Cost of goods sold – Manufacturing supplies

730 Cost of goods sold – Applied overhead

800 Bank charges

805 Benefits

810 Depreciation

815 Insurance

825 Office supplies

830 Salaries and wages

835 Telephones

840 Training

845 Travel and entertainment

850 Utilities

855 Other expenses

860 Interest expense

Download the 3-digit chart of accounts in excel here.

In the example, each block of related accounts begins with a different set of account numbers. Thus, current liabilities begin with “300,” revenue items begin with “600,” and cost of goods sold items begin with “700.” This numbering scheme makes it easier for the bookkeeper to remember where accounts are located within the chart of accounts. This type of account range format is also required by the report writing module in many accounting software packages.

Tip: As shown in the preceding example, leave plenty of room in the numbering assigned to accounts, so that additional accounts can be inserted between existing accounts at a later date.

The Five-Digit Chart of Accounts

A five-digit chart of accounts is used by organizations that want to track information at the departmental level. With a five-digit code, they can produce a separate income statement for each department. This format duplicates the account codes found in a three-digit chart of accounts, but then adds a two-digit code to the left, which indicates specific departments. The three-digit codes for expenses (and sometimes also revenues) are then duplicated for each department for which management wants to record information.

A sample of the five-digit chart of accounts format follows, using the accounting and production departments to show how expense account codes can be duplicated:

00-010 Cash

00-020 Petty cash

00-030 Accounts receivable

00-040 Allowance for doubtful accounts

00-050 Marketable securities

00-060 Raw materials inventory

00-070 Work-in-process inventory

00-080 Finished goods inventory

00-090 Reserve for obsolete inventory

00-100 Fixed assets – Computer equipment

00-110 Fixed assets – Computer software

00-120 Fixed assets – Furniture and fixtures

00-130 Fixed assets – Leasehold improvements

00-140 Fixed assets – Machinery

00-150 Accumulated depreciation – Computer equipment

00-160 Accumulated depreciation – Computer software

00-170 Accumulated depreciation – Furniture and fixtures

00-180 Accumulated depreciation – Leasehold improvements

00-190 Accumulated depreciation – Machinery

00-200 Other assets

00-300 Accounts payable

00-310 Accrued payroll liability

00-320 Accrued vacation liability

00-330 Accrued expenses liability – other

00-340 Unremitted sales taxes

00-350 Unremitted pension payments

00-360 Short-term notes payable

00-370 Other short-term liabilities

00-400 Long-term notes payable

00-500 Capital stock

00-510 Retained earnings

00-600 Revenue

00-700 Cost of goods sold – Materials

00-710 Cost of goods sold – Direct labor

00-720 Cost of goods sold – Manufacturing supplies

00-730 Cost of goods sold – Applied overhead

10-800 Accounting Bank charges

10-805 Accounting Benefits

10-810 Accounting Depreciation

10-815 Accounting Insurance

10-825 Accounting Office supplies

10-830 Accounting Salaries and wages  

10-835 Accounting Telephones

10-840 Accounting Training

10-845 Accounting Travel and entertainment

10-850 Accounting Utilities

10-855 Accounting Other expenses

10-860 Accounting Interest expense

20-800 Production Bank charges

20-805 Production Benefits

20-810 Production Depreciation

20-815 Production Insurance

20-825 Production Office supplies

20-830 Production Salaries and wages

20-835 Production Telephones

20-840 Production Training

20-845 Production Travel and entertainment

20-850 Production Utilities

20-855 Production Other expenses

20-860 Production Interest expense

Download the 5-digit chart of accounts here.

The preceding sample chart of accounts shows an exact duplication of accounts for each department listed. This is not necessarily the case in reality, since some departments have accounts for which they are the only probable users. For example, the accounting department in the example has an account for bank charges that the production department is unlikely to use. Thus, some accounts can be avoided by flagging them as inactive in the accounting system. By doing so, they do not appear in the formal chart of accounts.

Chart of Accounts Reduction

The typical chart of accounts contains hundreds or even thousands of accounts, with most of the accounts concentrated in the area of expenses. Most departments have roughly the same accounts, which are copied forward into any new department that a company creates. This leads to the following issues:

• Incorrect account usage. It is quite common for an expense to be charged to the wrong account within a department, which is discovered when the first draft of the financial statements is printed and reviewed. The result is that someone must create a journal entry to move the incorrect charge to a different account.

• Immaterial balances. The majority of all accounts contain small balances that have little impact on the reader’s understanding of a business. Instead, readers tend to focus on just a small number of accounts that contain the bulk of all transactions.

• Training. New bookkeepers may require extensive training before they are comfortable with recording transactions into the correct accounts.

• Audit cost. It takes longer for outside auditors to audit a lengthy chart of accounts, which can increase the cost of an audit.

• Financial statement links. If there are many account numbers, it can be difficult to map these accounts into a coherent set of financial statements. The result may be financial statements that incorrectly reflect the contents of the general ledger.

It may be possible to drastically shrink the number of expense accounts in use. In particular, consider using just the following mega-accounts:

• Direct costs. This account contains the cost of materials and supplies used in the production process, as well as freight costs, and not a great deal more.

• Allocated costs. The major accounting frameworks require that overhead costs be allocated. Therefore, have a single account that contains all factory overhead costs that are to be allocated. The account would include production labor, since this cost is not a direct cost of goods or services in most companies.

• Employee compensation. This account contains an aggregation of hourly wages, salaries, payroll taxes, and employee benefits.

• Business operations. This account contains all of the expenses required to operate a company on a day-to-day basis, such as non-factory rent, utilities, legal fees, and office supplies.

In addition, there may be a need for a small number of accounts in which information is aggregated for tax reporting or other specialized purposes, such as entertainment expenses.

When reducing the number of accounts, be aware that this makes it more difficult to compare a company’s financial statements to its historical financials. For example, an account may have been merged into another one that is now located in a different line item in the financial statements than was previously the case. This is a particular problem if accounts are being closed part way through a fiscal year, so that financial statement line items no longer show consistent results within the year.

There is no easy workaround for this issue, other than only closing down accounts at the beginning of each fiscal year. The concept of a massive reduction in the number of accounts might trigger cries of outrage from those bookkeepers who are accustomed to breaking down expenses into a multitude of buckets, which makes expenses easier to analyze.

However, consider these points:

• Usage of account analysis. Once the bookkeeper has provided a detailed variance analysis to management of the contents of each account, does anyone act on the information? Usually, they do not.

• Help or hindrance. How much time is spent by the bookkeeper in reviewing accounts and reporting variances to management, and how much time is spent by management in investigating these items without taking any significant remedial action? In other words, is account analysis really a continual cycle of uncovering “issues” and then explaining them away?

• Requirements of accounting standards. Accounting standards do not require a broad range of accounts. On the contrary, the standard-setting organizations have largely kept away from the business of requiring the use of certain accounts.

Even if these points are not sufficiently persuasive to result in a wholesale reduction in the number of accounts, at least use them as discussion points whenever anyone wants to increase the number of accounts – hopefully, these concepts will prevent the chart of accounts from becoming more bloated than its current state.


The bookkeeper should exercise a high degree of control over the chart of accounts. Accounts should not be added or subtracted without first considering how these changes will impact the recordation of transactions, the structure of the financial statements, and how information is compared between periods. The likely result is that changes to the chart of accounts are only made with caution and in an incremental manner over a long period of time.

Contact us for a free consultation on creating your chart of accounts.

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