1.08 – Starting with the Balance Sheet Accounts
The first part of the Chart of Accounts comprises balance sheet accounts, categorized into assets, liabilities, and equity. These accounts provide a snapshot of what the business owns, owes, and the owners’ equity.
Asset Accounts
Asset accounts track what the business owns. These include:
Current Assets
Assets expected to be used up within 12 months. Examples include:
- Cash in Checking: The primary account for operating activities, depositing revenues, and paying expenses.
- Cash in Savings: For surplus cash, earning interest until needed.
- Cash on Hand: Tracks cash kept at retail stores or offices for immediate needs.
- Accounts Receivable: Tracks credit sales to customers.
- Inventory: Tracks products available for sale.
- Prepaid Insurance: Tracks insurance paid in advance, credited monthly as used.
Long-term Assets
Assets used for more than 12 months, such as:
- Land: Tracks the cost of land owned.
- Buildings: Tracks the value of buildings owned.
- Accumulated Depreciation – Buildings: Tracks depreciation of buildings over time.
- Leasehold Improvements: Tracks improvements to leased properties.
- Accumulated Depreciation – Leasehold Improvements: Tracks depreciation of leasehold improvements.
- Vehicles: Tracks the cost of vehicles owned by the business.
- Accumulated Depreciation – Vehicles: Tracks depreciation of vehicles.
- Furniture and Fixtures: Tracks the cost of furniture and fixtures.
- Accumulated Depreciation – Furniture and Fixtures: Tracks depreciation of furniture and fixtures.
- Equipment: Tracks the cost of long-term equipment.
- Accumulated Depreciation – Equipment: Tracks depreciation of equipment.
- Intangible Assets: Includes accounts for:
- Organization Costs: Tracks start-up expenses.
- Amortization – Organization Costs: Tracks amortization of organization costs.
- Patents: Tracks costs associated with patents.
- Amortization – Patents: Tracks amortization of patents.
- Copyrights: Tracks costs for establishing copyrights.
- Goodwill: Tracks intangible value from purchasing another company.
Liability Accounts
Liability accounts track what the business owes to others. These include:
Current Liabilities
Debts due within the next 12 months, such as:
- Accounts Payable: Tracks money owed to vendors and contractors.
- Sales Tax Collected: Tracks sales tax collected from customers, payable to the government.
- Accrued Payroll Taxes: Tracks payroll taxes collected from employees.
- Credit Cards Payable: Tracks outstanding credit card balances.
Long-term Liabilities
Debts due after more than 12 months, such as:
- Loans Payable: Tracks long-term loans, like mortgages.
- Notes Payable: Tracks borrowed money from other businesses without collateral.
Equity Accounts
Equity accounts track owners’ contributions and their claims on the business. These include:
- Common Stock: Reflects the value of outstanding shares sold to investors.
- Retained Earnings: Tracks accumulated profits or losses since the business opened.
- Capital: For small, unincorporated businesses, reflecting owner contributions.
- Drawing: For unincorporated businesses, tracking money taken out by the owners.
Practical Tips
- Regular Updates: Review and update your Chart of Accounts periodically to ensure it meets your business needs.
- Detailed Descriptions: Provide clear descriptions for each account to avoid confusion.
- Consistency: Maintain consistency in naming conventions and account categorization.
By organizing your financial transactions with a well-structured Chart of Accounts, you gain valuable insights into your business’s financial health and make smarter financial decisions.
