Question

Create a simple Chart of Accounts for an owner/ operator business such as a lawn mowing round and also mention how the opening balance for each cost centre/ account can be established? Discuss in 80–100 words.

Answer 1

To create a chart of account we should establish the broad categories in which transactions will happen. Generally I would divide any chart of accounts in five segments.

a. Income
b. Expense
c. Asset
d. Liability
e. Capital

After dividing COA into these categories you need to decide the hierarchy of COA i.e. what will come first I would prefer the following hierarchy

1. Capital 2. Assets 3. Liability 4. Income 5. Expenese

Now, we need to give an account code to the respective category

Capital Master will have 1000 (You can keep it 3-4-5 digits as per your requirement, 4 is preferable digit of accounts because you can create child segments too an identify those easily for example I will keep Mr. A Capital Contribution in 1100 series Mr. A withdrawal in 1200 series, retained earnings in 1300 series and likewise)

Asset Master will have 2000

Liability Master will have 3000

Income Master will have 4000

Expense Master will Have 5000

I did not really understood the second part of your question, how will you establish opening balance of each account. Though I will answer assuming you required the nature of balance in each category

Capital will have credit balance, Asset will have debit balance, Liability will have credit balance, Income will have credit balance and expenses will have debit balance

Please feel free to raise your query in the comments section