General Ledger: How to Setup Your Chart of Accounts

Updated: Aug 7



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.


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.


READ 12 ACCOUNTS ALL BUSINESS OWNERS SHOULD KNOW


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. For small businesses they may not need to setup 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 to GL accounts.


Sample Cost Centers

  • HR

  • Finance

  • Customer Service

  • Executive Offices

  • Information Technology

Hierarchy


Sample hierarchy of a typical business chart of accounts.

READ UNDERSTANDING FINANCIAL STATEMENTS


Understanding the organization of your chart of accounts is an important piece to understanding your financial statements. GFT's accounting services can help you setup your GL accounts that best reflect your business model and help you effectively track your operating metrics.

16 views

Follow

©2018 BY GLOBAL FINANCE TEAMS, INC  |  SITEMAP