Chart of Accounts
Wild, Shaw and Chiappetta (2015, p.58) defines the chart of accounts as a list of financial accounts used by the company to identify specific transactions in its journal/ledgers. Warren, Reeve and Fess (2005, p.48) pointed out that the ledger accounts are usually listed in a specific order, which is either from the most significant value or its ease of liquidation. But some companies list their chart of accounts based on their order of appearance in the financial statements (Warren, Reeve and Fess, 2005, p.48). However, in order to facilitate the tracking of business transactions for future references each of the ledger/journal accounts are assigned a specific identification number (Wild, Shaw and Chiappetta, 2015, p.58).
The purpose of the specific identification number is to know additional details with regards to the general ledger accounts such as the accounts receivables (Walther and Skousen, 2009, p.83). This is because most of these general ledger accounts are subdivided into specific customers so that the company can determine how much they can still collect from each customer (Walther and Skousen, 2009, p.83). Walther and Skousen (2009, p.83) pointed out that the additional benefit of the specific identification number is to improve the ease of data mining especially with the increasing use of information technology systems. Most companies use the same numbering system for its ledger accounts with the control account of 101-199 assigned to asset accounts, 201-299 to liability accounts, 301-399 to equity accounts and so on (Wild, Shaw and Chiappetta, 2015, p.59). The trailing digits attached to the control account numbers are used to determine a specific subsidiary account such as a customer, supplier, property (Walther and Skousen, 2009, p.83).
Types of “Chart of Accounts”
The SAP FICO segregated the chart of accounts into three types and these are the operating chart of accounts, group chart of accounts, and the country specific chart of accounts (Your, 2016). The country specific chart accounts are the ledger accounts required for legal purposes or requirements (Your, 2016) such as taxes and other government deductibles. Even though these are considered to be an optional requirement most companies prefer to include these in the chart of accounts in order to accumulate the total amount owed to the government. The group chart of accounts is designed to produce a general overview report of the company’s operations (Your, 2016) and does not require the more detailed information. These reports are specifically designed for decision making purposes of the corporate or management team (Your, 2016).
The most common type is the operating chart of accounts since it details the financial accounts used by the company on a daily/weekly/monthly basis (Your, 2016). These are often grouped based on a specific type of financial statement accounts such as assets, liabilities, owner’s equity (Warren, Reeve and Fess, 2005, p.48), revenues and expenses (Wild, Shaw and Chiappetta, 2015, p.59). But in case there are multiples stores/branches the company also assigns an additional code to minimize confusion when management needs to determine the actual source and values of the business transactions (Your, 2016). The reason for the additional code is in case the company not only operates on a state or national level but also in international countries as well.
References
Walther, L. M. and Skousen, C. J. (2009). Managerial and cost accounting. USA: Ventus Publishing ApS.
Warren, C. S., Reeve, J. M., and Fess, P. E. (2005). Accounting (21st ed.). United States: South-Western.
Wild, J. J., Shaw, K. W. and Chiappetta, B. (2015). Fundamental accounting principles (22nd ed.). New York: McGraw Hill Education.
