How to organise the Chart of Accounts

Classification of Accounts and the Accounting Equation

What you need

• A full list of every account the business uses (assets, liabilities, equity, revenue, expenses).
• An understanding of the five main account groups and their sub-groups (current/non-current).
• A chosen numbering system or code range for each group.
• The layout of the Statement of Financial Position and Income Statement as an ordering guide.

Step by step

1. 1

   List every account the business uses

   Gather each account used by Perniagaan Setia, a retail shop run as a sole proprietorship. Example list: Motor Vehicle, Shop Fittings, Inventory, Bank, Cash, Accounts Receivable, Bank Loan, Accounts Payable, Capital, Drawings, Sales, Purchases, Shop Rent, Wages and Utilities. List them all first, without leaving any out, before you start classifying.

2. 2

   Sort into the five main groups

   Separate each account into five groups: Assets, Liabilities, Owner's Equity, Revenue and Expenses. For Perniagaan Setia, Assets: Motor Vehicle, Shop Fittings, Inventory, Bank, Cash, Accounts Receivable; Liabilities: Bank Loan, Accounts Payable; Owner's Equity: Capital, Drawings; Revenue: Sales; Expenses: Purchases, Shop Rent, Wages, Utilities. Drawings sits under Equity (a reduction of capital), not under Expenses.

3. 3

   Break each group into sub-groups

   Split Assets into Non-current Assets (Motor Vehicle, Shop Fittings) and Current Assets (Inventory, Accounts Receivable, Bank, Cash). Split Liabilities into Non-current Liabilities (Bank Loan) and Current Liabilities (Accounts Payable). These sub-groups make preparing the Statement of Financial Position easier later.

4. 4

   Assign a code range to each group

   Give each group a block of numbers so codes never overlap: Assets 1000-1999, Liabilities 2000-2999, Owner's Equity 3000-3999, Revenue 4000-4999, Expenses 5000-5999. Within Assets, allocate 1000-1499 to Non-current Assets and 1500-1999 to Current Assets; within Liabilities, 2000-2499 for Non-current and 2500-2999 for Current.

5. 5

   Assign specific codes and leave gaps

   Number the accounts in steps of ten so there is room for new accounts. Example: Motor Vehicle 1010, Shop Fittings 1020; Inventory 1510, Accounts Receivable 1520, Bank 1530, Cash 1540; Bank Loan 2010; Accounts Payable 2510; Capital 3010, Drawings 3020; Sales 4010; Purchases 5010, Shop Rent 5020, Wages 5030, Utilities 5040. The gap of ten lets an account like Office Equipment 1030 slot in later.

6. 6

   Order by the financial-statement sequence

   Arrange the chart in the order of the Statement of Financial Position (Non-current Assets, Current Assets, Owner's Equity, Non-current Liabilities, Current Liabilities) followed by the Income Statement (Revenue, then Expenses). This order makes each account easy to trace and carry into the statements without confusion.

7. 7

   Test the chart with real transactions

   Check the codes work by recording transactions using them. First example, a cash sale of RM500: Debit Cash (1540) RM500; Credit Sales (4010) RM500. Second example, goods bought on credit for RM800 from a supplier (Invoice 305): Debit Purchases (5010) RM800; Credit Accounts Payable (2510) RM800. Each account is easily identified by its code.

8. 8

   Document and update the chart

   Record the chart in a reference table showing the code, account name and group. When a new account is needed, say Commission Received, slot it into the Revenue block as 4020 without disturbing existing codes. Review the chart whenever a new type of transaction appears so it stays complete and tidy.

Second example

Compare this with Salon Harmoni, a service business. Because it sells no goods, its chart has no Inventory or Purchases accounts, and its revenue is not Sales but Service Fees (coded 4010 in the Revenue block 4000-4999). Its Non-current Asset might be Salon Equipment 1010, while Current Assets include Bank 1530 and Cash 1540. When the salon receives RM300 in cash for a service, the entry is Debit Cash (1540) RM300; Credit Service Fees (4010) RM300. The group structure and code ranges stay the same; only the names and number of accounts change with the type of business.

Common mistakes

Related chapter: Classification of Accounts and the Accounting Equation →

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