The Role of the Chart of Accounts

A chart of accounts is a classification system to organize your transactions into meaningful classes of financial information.  It is a listing of all your accounts in the general ledger, and the general ledger is a listing of all company transactions.  Your chart of accounts is the backbone to your accounting system.  There are two types of accounts in your chart of accounts.

There are Balance Sheet accounts such as cash, accounts receivables, accounts payables, etc., and there are Income Statement accounts such as revenue, expenses, COGS, etc.  As the names suggest, all this means is that when you print your financial statements, all Balance Sheet accounts will appear on the Balance Sheet, and all Income Statement accounts will appear on the Income Statement.

The Balance Sheet and Income Statement serve different purposes.  Balance Sheet accounts are what we call “permanent” accounts (they keep score from day one and do not zero out their balances at the end of the year; their balances are cumulative since the first day you started your company), and Income Statement accounts are what we call “temporary” accounts (the balances in them start anew every year).

 

Disclaimer: Unfortunately, it is impossible to give comprehensive financial, accounting, or bookkeeping advice through the internet. Before relying on any information given in this book, contact an accounting professional to discuss your particular situation.