Question

As you might imagine, the chart of accounts for a manufacturing firm would be different from that of a service firm. Not surprisingly, service firms differ so much that software now exists for almost any type of firm that you could name. Think of yourself as an entrepreneur who is going to start up your own business. Now, go to an Office Depot, Staples, or similar office supply store (or search online) to find at least two different software. packages that you might use for the type of firm you are going to start up. What does the chart of accounts include? Are both software packages the same? What are the differences between the packages?

Answer 1

What is a 'Chart of Accounts'

A chart of accounts (COA) is a listing of each account a company owns, along with the account type and account balance, shown in the order the accounts appear in the company’s financial statements. “Chart of accounts” is the official accounting term for the display of this information, which includes both balance-sheet accounts and income-statement accounts.

BREAKING DOWN 'Chart of Accounts'

An account is a unique record for each type of asset, liability, equity, revenue and expense. The chart of accounts is a financial organizational tool that provides a complete listing of every account in the general ledger of a company, broken down into subcategories. Each chart in the list is assigned a multi-digit number to help identify the account type (e.g., all asset accounts might start with the number 1). Typically, a COA contains the accounts’ names, brief descriptions and identification codes.

Using a COA, balance sheet accounts are listed first, that is, assets, liabilities and shareholders' equity. Accounts in the income statement — revenues and expenses — are presented next.

To start a business various types of software packages are required. for example the following :-

1. Office Automation Software - to automate the daily office work

2. Mail Server - which acts as a communication medium between organisation employees.

3. Accounting Software - Helps in recording the daily transactions of business i.e. sales , purchases, expenses, etc.

4. Enterprise Resource Planning - This software has many modules such as purchases, inventory, HR, General Ledger, MIS etc. it helps in generating daily reports helpful to the management.

For a small corporation, the chart of accounts might include these sub-accounts under the assets account:

• cash
• savings account
• petty cash balance
• accounts receivable
• undeposited funds
• inventory assets
• prepaid insurance
• vehicles
• buildings

Liabilities account may have sub-accounts, such as:

• the company credit card
• accrued liablities
• accounts payable
• payroll liabilities
• notes payable

Shareholders' equity can be broken down into the following accounts:

• common stock
• preferred stock
• retained earnings