• Brian R. Schobel, CPA

Understanding Your Chart of Accounts



Before you can start recording any financial transactions, you’ll need to create a chart of accounts for your company. This is the backbone of your entire business, the chart of accounts is where all of your general ledger accounts reside. The chart of accounts records every financial transaction that your business has made.


But before you start, be sure to familiarize yourself with the five account types that will be used in your chart of accounts:


Assets: Anything of value that your business owns is considered an asset. Assets include the money in your bank account, your accounts receivable balance (what your customers owe you), your inventory, computers, and furniture.


Liabilities: Liabilities are anything your business owes. Liabilities include your accounts payable balance (what you owe vendors) as well as any loans or notes the business owes.


Revenue / Income: Revenue is the money your business earns from goods solds or services rendered.


Expenses: This is one category you’re probably familiar with; expenses are considered the cost of doing business. Common business expenses include employee wages, the rent on your storefront, and your electric bill.


Equity: After subtracting your business liabilities from your business assets, you’re left with equity, which represents the financial interest you hold in your business.


When set up properly, your chart of accounts can provide you with detailed information about your business. And it helps to ensure that the information you do retrieve, such as financial statements, give an accurate representation of your business.