Chart of Accounts
Wow, first buzz word! After reading all these articles in the bookkeeping beginner session, you should be able to throw some buzz words when you meet with your investors, business partners and accountants.
A simple definition of Chart of account: It is a list of categories you decide to keep track of, and each of these categories belongs to an account (asset, liability, equity, income, or expense). E.g. Parking is an expense account. Cash is an asset account. I will explain later how to assign account to category, and of course what is asset, liability, and equity
In the accounting world, the definition of account does not mean an actual bank account. Instead, you can think of an account as place holder, or a category to track your money movement. E.g. Parking is paid by Cash. In this case money from the Cash asset account should be deducted, and Parking expense account should be increase. This “accounts” concept can be a whole course in itself; luckily we don’t need to know them to do bookkeeping. The whole concept can be summarized as:
Asset + Liability = Equity
And
Income – Expenses = Gross profit
Let me explain:
Asset – It is what you own, includes cash, stocks and shares, car, equipment, office building, computer, furniture, etc.
Liability – It is what you owe, includes bank loan, supplier credits, bank credit cards, mortgages, etc.
Equity – It is how much the owners put into the business, plus the business profit
First, let’s define the list of categories you might want. Let’s say you run a convenient store business. You may have the following category:
Asset:
Bank Checking Account
Cash
Inventory
Liability
Supplier Charge Card
Bank Business Loan
Your Sister’s Loan
Income
Newspaper Income
Lottery Income
All other income
Expenses:
Employee Salaries
Automobile Expenses
Parking
Inventory Purchases
The chart of accounts should be ready before you begin any bookkeeping exercise, so take some time to set up the chart of accounts.
