CHART OF ACCOUNTS

How to Prepare a Chart of accounts

A Chart of accounts if designed with logic and with standardization  can be very useful for correct data entry , consolidation as well as analysis,

Let us go with an example

There are primary Four types of accounts Assets , Liabilities , Expense &  Income

Let us assume that we use a ten digit numeric account code

The first digit should be used to define the type say

1=Asset
2=Liability
3-Expense
4=Income

Now under Asset Major Groups are

Goodwill & Patents , Fixed Asset ,Investments &  Current Assets

So the next two digits can be assigned to these major groups starting from 01 upto 99

Let us assume For Fixed asset we assign 05 ; So the Maojor Account Code for Fixed asset will be

1050000000

Under each of them we would have sub categories

For example under Fixed Assets there would be Land , Buildind , Plant & Machinery etc

Again we can assign next two digits from 01 to 99 for each of them

So for Land we assign 02

So for all Land the Master Code will be 1050200000

Under Land we may have Free Hold Land and Lease Hold Land

and we may assign only 1 digit for the same between 1 to 9

Say 1 for freehold & 2 for Lease hold

So the code for Free hold will be

1050210000

Now we may have any number of Free Hold Land  for which we may use the last four digits

from 1 to 9999

Suppose we assign 1 to a Land in Andheri in Mumbai

So Land in Mumbai at Andheri would be

1052100001

We may also use the third and fourth last digits for state classification or any other if we want.

The idea is that by doing so we have designed our account codes with a logic so that
a ) At the time of data entry we know which account codes to be used ,
b) Grouping of account codes for consolidation becomes easier and
c) Also analysis and reconciliation for various reporting where we need to know the nature of the account is also simple as the name sometimes may be confusing.