Guide to Chart of Accounts Key Terms

Learn some chart of accounts terminology and start organizing your business's transactions

By Elise Matz

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A chart of accounts is a method of organizing all types of financial transactions into a single ledger so a business can get an accurate picture of its financial health. For a small business, a chart of accounts might be a very simple affair; a large business could have a lengthy and complex list.

Though there are standard ways of organizing a chart of accounts, the system also allows for flexibility. Accountants are free to track whatever accounts they see fit, and categorize accounts in whatever way makes the most sense.

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Account

In the context of the accounting cycle, "account" can refer to any type of financial transaction, each of which is recorded into the chart of accounts ledger. In most accounting systems, accounts are divided into five categories: assets, liabilities, equity, revenue and expenses.

I recommend: AccountingAide.com lists these categories, as well as the types of accounts that might be recorded under each.

Index, code or key

When recording transactions in a master ledger, accountants assign each account a code, usually a number. Ideally, this is done in a systematic manner to prevent confusion and make it easy to prepare an account summary. The chart of accounts is the code that relates the numbers to the type of account.

I recommend: The Entrepreneur Network has a great tutorial with a detailed example of a chart of accounts system.

Assets

The assets category of a chart of accounts includes cash, accounts receivable and tangible items like equipment. This is usually the first category in a chart of accounts system; when an earnings statement is needed, the accountant can simply add up the first block of figures.

I recommend: QuickBooks explains how assets fit in to a chart of accounts.

Liabilities

Liabilities can include accounts payable, payments due on loans, payroll and taxes. In business, it is usually necessary to take on liability in order to pay employees and acquire inventory, for instance. Companies that pay their current liabilities will be able acquire more in the future.

I recommend: MoneyInstructor.com defines liability as it relates to business accounting.

Owner's equity

Owner's equity is essentially assets minus liabilities. The phrase itself implies sole proprietorship; otherwise, the correct term would be stockholder's equity. Accounts in this category might include common stock and retained earnings.

I recommend: AccountingCoach.com has a great tutorial on owner's equity.

Revenue and expenses

Revenues and expenses are much like assets and liabilities; but in a chart of accounts system, assets and liabilities carry over from year to year, while revenues and expenses start from zero.

I recommend: Bean Counter has an in-depth explanation of revenue and expenses.