What is a Chart of Accounts?
A chart of accounts is a numerical and descriptive listing of all accounts that make up the line items on your balance sheet and profit and loss statements. The general ledger is where your transactions are recorded as debits and credits which are the basis of your financial statements. Each of these accounts are generally referred to as GL accounts.
Why is it Important?
To produce a meaningful profit and loss statement and analysis on operating metrics, the chart of accounts must be organized in a fashion that reflects the structure of the business. If you truly want to understand the financial health of your business, you will need to understand the concepts of the chart of accounts.
Sample GL Accounts:
1001 General Checking Cash
1002 Accounts Receivables
1003 Inventory
1004 Fixed Assets
1005 Accumulated Depreciation
2001 Accounts Payable
2002 Notes Payable
3001 Owner's Capital
3002 Retained Earnings
4001 Sales
5001 Cost of Goods Sold
etc
Profit Centers
In larger companies, there can be multiple profit centers as they need to track separate business units’ profit and loss. A profit center can be used to track the financials of a separate division of a company or a separate product line with its own revenue and costs. Small businesses may not need to set up multiple profit centers as their entire business is completely centralized. A profit center has a one-to-many relationship to cost centers.
Cost Centers
A cost center is a sub-unit of the profit center, and it can be used to organize the costs of multiple departments in an organization. A cost center has a one-to-many relationship with GL accounts.
Sample Cost Centers
HR
Finance
Customer Service
Executive Offices
Information Technology
Hierarchy
Sample hierarchy of a typical business chart of accounts.
Understanding the organization of your chart of accounts is an important piece to understanding your financial statements. GFT's accounting services can help you set up your GL accounts that best reflect your business model and help you effectively track your operating metrics.