Question

5. What is a chart of accounts? Why is it needed for businesses?

Answer each question in 100+ words

Answer 1

What is chart of accounts:

Chart of accounts is a tool to organize the financial information of a business.

It is used for financial recordkeeping.

It is tool that lists the names of the accounts that a business has identified and makes available for the business to record the routine transactions in the general ledgers.

A chart of accounts segregates the components of the financial statements such as expenditures, revenues, assets and liabilities.

Typically, chart of accounts , lists the accounts in the following order:

Balance Sheet - Assets, Liabilities, Capital

Income & Expenditure Statement – Operating Revenues and expenses; non operating revenues and expenses.

It is an answer to the question – from where money comes? And where it goes in the business.

Why it is needed for business:

Business requires information on from where the revenue comes to it and where it is expensed. And for that, it requires a tool that gathers and organizes the required financial information.

It helps to organize the financial information for tax purposes as well as for audit purposes.

It is needed to comply with the financial reporting framework.

It is needed for managerial accounting which requires preparation of budgets and also budgetary analysis.

It provides the information required for cost accounting and helps in eliminating the unnecessary costs.

The chart provides information to management for decision making and also helps the users of financial statements to analyze the financial health of the business.