Importance of Chart of Accounts

Chart of accounts is the list of accounts and the account numbers that identify their location in the ledger. So, chart of accounts has some importance. This importance of chart of accounts are as follows:

Importance of chart of accounts

Chart of accounts is made by an organization to prefix what accounts are used in the business.  It has the following facilities:

  1. All accounts are listed here to deal with the business.
  2. It ensures a definite number of account titles.
  3. It indicates the scope of accounts to deal with the business.
  4. It ensures the limits of transactions.
  5. It protects the problems of title fixation.
  6. It locates the position of each account easily.

To gist up, chart of accounts is the controlling tool of account titles for every business.

Importance of chart of accounts

Importance of chart of accounts

According to Wikipedia “It is applied to organize the finances of the object and to segregate investments, revenue, assets, and liabilities to give affected parties a better understanding of the economic health of the entity. Usually defined by an identifier and a subject describing text title and coded by account type.”

Why is this important? The chart of statements quite just projects your investments so that reports get more understanding. It creates an ordered system to read the financials. Outdoors it, you would have all the same info, but it would not be all over the place, and very difficult to decipher.
Some larger manufacturers will use a detailed version, while most small manufacturers can get away with a much shorter, more soaked down version but they are all the same. Regardless of business size, industry, or entity standard, they all accept a chart of accounts.
This is not unique to any industry, or object type, it is the same for every transaction. When you are beginning to set up your outline of accounts, it will be designed the same as every other company. Bank measures first, then all assets, liabilities, equity, income, and interests in that order.
Your accounts receivables are considered an asset, and so is your interest, but they are two entirely different things. Accounts Receivables are trading claims against the business of a customer arising from the sale of advantages and services. Revenue is what you have collected from the sale of merchandises or services. If you bill a consumer and give them time to pay it is descriptions receivable, and when you collect the coins, deposit it into your chronicle then it is income.

Liabilities are notes owed by the corporation. So if you are leasing or ordering anything on credit, then it is a possibility. An equity account would be any devices the company has paid for. Or would receive the salary for if sold. If you had a loan on transportation, the payment would be a contract while the agency itself would be equity. As you make a payment, the significance of the liability goes down while the amount of the property account would increase. So to keep your balance sheet certain you would need to follow both.
Taxes are just that, money paid out by the business for the performance and composition of goods and services paid for directly. For example, things like management to Staples for the acquisition of office quantities, or if you went to the gas terminal for fuel for the fleet of vehicles, it is simply an investment. Where accounts payable would be payments that you did not pay proper away. So if you purchased materials for a background job, but the person you bought them from gave you 15 days to pay the statement that would be accounts payable.
When you are following your accounting whether you are using the old traditional paper and pencil, or use accounting software, you need to understand where your capital is coming from, and where it is going the chart of statements is simply the classification system used to keep this information together.

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1 comment for “Importance of Chart of Accounts

  1. King
    March 10, 2018 at 10:42 AM

    Hello, I have read the article carefully and I found this article really helpful for me, it helps me on the chart of accounts.

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