While installing your new accounting software, you have most likely been asked whether you want to use one of the default graphs of accounts incorporated with this program or develop your own. Unless you are very acquainted with setting up a couple of financial books you will want to choose in one of the choices offered.
And even though you have the knowledge choosing one of the defaults will save you significant amounts of time. But you may ask imagine if I don’t need each one of these accounts and how do you know which accounts I should keep. And should a numbering is utilized by me system or not? Let me help you by explaining what a Chart of Accounts is as well as how to adjust the default list to your preferences.
First of most a Chart of Accounts in its simplest definition is a list of accounts used to monitor all financial transactions that movement through a business. This list is normally broken directly into eight segments: Assets, Liabilities, Equity, Income, Cost of Goods Sold, General and Administrative Expenses, Other Income and Other Expenses.
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You might see Equity referred to as Capital, Cost of Goods Sold known as Direct Costs, and Administrative and General Expenses known as Expenditures. Companies that desire to track Sales Expenses such as commissions, salaries, and related expenses of sales personnel and other costs related directly to sales activity might also add a Sales Expense segment.
The first three sections represent the accounts you will see on the Balance Sheet and they will be divided into sub-segments. Under Assets you shall find sub-segments for Current Assets, Fixed Assets and sometimes Other Assets. Current Assets accounts are used for assets that may be liquidated into cash readily, such as cash, investments, accounts, and notes receivables, and deposits.
You may choose when establishing more than one cash accounts or receivable accounts to make a further section. This will allow you to summarize all your cash accounts, for example, on the balance sheet while keeping a separate recording account for every bank account. Fixed Assets accounts are used to record the price of items purchased that have a useful life that stretches beyond twelve months.
The Fixed Assets segment also contains contra-accounts (reduction of the value of an asset) that are used to record the depreciation of your set assets. These contra-accounts are typically named “Allowance for Depreciation – (name of a kind of fixed asset)”. You ought to have a fixed asset account and matching depreciation account for every type of set asset you get. A few examples are vehicles, office furniture and equipment, building, or leasehold improvements.
The Other Assets segment is utilized for all the types of resources. Likewise the Liabilities segment is broken into Current Liabilities and Long-Term Liabilities. Current liabilities stand for the company’s liabilities that should be paid in under one year. Examples are Accounts Payable, Payroll Tax Liabilities, and Note Payable.
Long Term Liabilities represent liabilities that should be paid over a longer term than one year such as mortgages, vehicles loans and other long-term debt. The third segment of the balance sheet is the Equity, or Capital, portion. This segment contains accounts that record the owners, partners, or shareholders’ investments, draws of revenue extracted from the ongoing company by the traders, and the web revenue of the business.
For each owner or partner within a business entity there should be an individual investment account and draw accounts. Whenever a company is incorporated than the administrative center investment by the shareholders is recorded into capital stock accounts. These accounts may be broken down further if different kinds of stock are issued. The Retained Earnings account can be used to record the profit, or loss, the ongoing company has gained right from the start of its living.