Chart of accounts

Chart of accounts is an index of all the accounts where the company files away its financial information. The chart of accounts is a listing of all the company’s account names and numbers where it records its financial transactions.

An Account is a separate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases using debits and credits for a period of time and the resulting ending balance at the end of the period. All the Individual Accounts make up or become a part of the Chart Of Accounts.

Major types of accounts are:

  • Assets 
    Formal Definition: The properties used in the operation or investment activities of a business.
    Informal Definition: All the good stuff a business has (anything with value). The goodies.
    Includes: Cash, Receivables, Investments, Buildings, Land, Equipment, Vehicles, etc.
  • Liabilities 
    Formal Definition: Claims by creditors to the property (assets) of a business until they are paid.
    Informal Definition: Other’s claims to the business’s stuff. Amounts the business owes to others.
    Includes: Payables, Notes, Loans, Mortgages, etc.
  • Equity 
    Formal Definition: The owner’s rights or claims to the property (assets) of the business.
    Informal Definition: What the business owes the owner(s). The good stuff left for the owner(s) assuming all liabilities (amounts owed) have been paid.
    Includes: Owner’s Capital Invested and the Accumulated Profits or Losses for the business since it began.
  • Revenue 
    Formal Definition: The gross increase in owner’s equity resulting from the operations and other activities of the business.
    Informal Definition: Amounts a business earns by selling services and products and investing. Amounts billed to customers for services and/or products.
    Includes:
    Sales of Goods and Services – revenue directly related to daily operations.
    Other Income – revenue not directly related to daily operations such as Interest and Dividends.
  • Expenses 
    Formal Definition: Decrease in owner’s equity resulting from the cost of goods, fixed assets, and services and supplies consumed in the operations of a business.
    Informal Definition: The costs of doing business. The stuff we used and had to pay for or charge to run our business.
    Includes:
    Cost of Goods Sold – the cost of the products being sold by the business.
    Operating Expenses – the expenses related to daily operations such as rent, advertising, insurance, etc.
    Other Expenses – the expenses not directly related to daily operations such as Interest and Financing.

 

Accounting basics

1. Income Statement

The income statement is one of the major financial statements used by accountants and business owners. (The other major financial statements are the balance sheet, statement of cash flows, and the statement of stockholders’ equity.) The income statement is sometimes referred to as the profit and loss statement (P&L).

 income statement, does not report the cash coming in—rather, its purpose is to (1) report the revenues earned by the company’s efforts during the period, and (2) report the expenses incurred by the company during the same period. The purpose of the income statement is to show a company’s profitability during a specific period of time. The difference (or “net”) between the revenues and expenses for a company is often referred to as the bottom line and it is labeled as either Net Income or Net Loss.

Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out).

A. Revenues

occur when a sale is made or when they are earned. Revenues are frequently earned and reported on the income statement prior to receiving the cash.

B. Expenses

expenses incurred regardless of when the company actually paid for the expenses.

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