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Assignment # 1 1. What is chart of accounts? Chart of accounts (COA) is a list of the accounts used by an organization. The list can be numerical, alphabetic, or alpha-numeric. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique to allow its ledger to be located. The list is typically arranged in the order of the customary appearance of accounts in the financial statements, profit and loss accounts followed by balance sheet accounts.
It is a numerical listing of all identified accounts used by a company to record transactions. As part of the accounting cycle, the chart of accounts is used in the journaling process (i. e. , performing journal entries) and also serves as the title for each ledger. All the accounts will be filed under one of five categories: • Assets • Liabilities • Owner’s Equity • Revenue • Expenses Each account can be assigned a number for identification purposes. Most systems will assign a block of numbers to one of the five categories to be applied to the sub-categories.
Some charts leave gaps of numbers between the sub-category listings to allow for the addition of new accounts. Sample Chart of Accounts Chart of Accounts: Bogus Manufacturing 100-199 Assets • 100-109 Cash o 101 Cash – Regular Checking o 102 Cash – Payroll Checking o 103 Cash, Change, or Petty Cash Fund • 110-119 Receivables o 111 Accounts Receivable o 112 Due from Employees o 113 Notes Receivable • 120-129 Property, Plant, and Equipment o 121 Land o 122 Buildings o 123 Equipment o 124 Vehicles 200-299 Liabilities • 200-209 Current Liabilities 201 Notes Payable – Credit Line o 202 Accounts Payble o 203 Wages and Salaries Payable o 204 Taxes Payable • 210-219 Long-term Liabilities o 211 Mortgage Loan Payable o 212 Bonds Payable, due 2015 o 213 Discounts on Bonds Payable 300-399 Owner’s Equity • 300-309 Stock o 301 Preferred Stock o 302 Common Stock o 303 Retained Earnings 400-499 Revenues • 400-409 Product Sales o 401 Store #1 Sales o 402 Store #2 Sales o 403 Store #3 Sales • 410-419 Other Income o 411 Interest Revenue 500-599 Expenses • 500-509 Insurance o 501 Disability Insurance o 502 Property & Casualty 500-509 Interest Expense o 501 Finance Charge o 502 Loan Interest o 503 Mortgage 2- How does it support accounting information system? Because the chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger it is able to support the accounting information system which is the system of records, a business keeps to maintain its accounting system. It also organizes the information and the accounts in a systematic manner and allocates unique reference numbers to each account.
This makes it easier for the required information to be located, also, the function of this accounting information system is to accumulate data and provide information to the decision makers and hence the chart of accounts and the accounting information system complement each other in the process of data collection and organizing it. 3. How many levels are recommended to be made in chart of accounts? Chart of accounts (COA) is a list of the accounts used by an organization. The list can be numerical, alphabetic, or alpha-numeric. The structure and headings of accounts should assist in consistent posting of transactions.
Each nominal ledger account is unique to allow its ledger to be located. The list is typically arranged in the order of the customary appearance of accounts in the financial statements, profit and loss accounts followed by balance sheet accounts. Levels: Balance Sheet Accounts 1. Assets: Assets include the tangible items a company possesses. It includes Cash, Bank Accounts, Accounts Receivable (Debtors), Prepaid Expenses, Inventory (Stock on Hand), Land, Buildings, Vehicles & Equipment, Investments & Stocks, Accumulated Depreciation and Other Assets . Liabilities: The next recommended level for the chart of accounts is liabilities. Liabilty is the obligation to pay money to another party. It includes Accounts Payable (Creditors), Credit Cards, Tax Payable, Employment Expenses Payable, Bank Loans etc. 3. Stockholders’ Equity Accounts: The next level is the Stockholders’ Equity Account. Equity means funds contributed by stockholders through direct payment and through retained earnings. Owner’s equity means the owners’ interest in the assets of a business.
Owners’ equity includes the amount invested by the owners plus the profits (or minus the losses) in the enterprise. Owners’ equity and liabilities are used to finance a firm’s assets. Profit & Loss accounts 1. Revenue Accounts: The inflow of assets that results from sales of goods and services and earnings from dividends, interest, and rent is called revenue. It is often received in the form of cash but also may be in the form of receivables to be turned into cash at a later date. Examples of revenue accounts include Sales Revenue, Sales Returns & Allowances, Sales Discounts, Interest income. 2.
Cost of Goods Sold Accounts: COGS is the costs that go into creating the products that a company sells; therefore, the only costs included in the measure are those that are directly tied to the production of the products. For example, the COGS for an automaker would include the material costs for the parts that go into making the car along with the labor costs used to put the car together. The cost of sending the cars to dealerships and the cost of the labor used to sell the car would be excluded. This account includes Purchases and sales Expense All sales Expense Purchase Returns & Allowances. 3.
Expense Accounts: This account caters to the company’s expenditure in order to keep itself operating. Major expenses a company comes across are Advertising Expense, Bank Fees, Depreciation Expense, Payroll Expense, Payroll Tax Expense, Rent Expense, Income Tax Expense, Office Expense, Utilities Expense. Multi-level Chart of Accounts Highlights 1. Track multiple organizational segments such as companies, business units, or profit centers 2. Hierarchy of departments can be consolidated by levels for summary purposes 3. Financial data can be viewed at various levels of the overall business hierarchy 4.
Financial reporting can be performed at multiple organization levels, from a department or facility through company and business unit to an overall consolidated enterprise 5. Various legal entities can each operate with their own base currencies while being consolidated into a common corporate currency at an overall enterprise level. 4- Why unique coding is allocated to each accounting head? To answer to this question, one first knows what a code is. A code is numbers, letters, or a combination of letters and numbers (alphanumeric) that is used to represent, identify, and organize something.
The code itself, the numbers, letters, or combination of letters and numbers is usually meaningless. The code gets its meaning when it is assigned or related to something (object) such as a document (invoice number), employee, product, account, etc. In accounting, one of the main uses of codes is to identify accounts. Account Codes can be numeric (numbers), alpha (letters of the alphabet) , or alphanumeric (combination of numbers and letters). As coding applies to bookkeeping and accounting we just mean that we assign a name, number (or both), description, and group or category identifiers to each unique account.
Codes are used to identify accounts, so they must be unique. The Chart of Accounts is the structure for the coding elements used to classify, record, budget and report financial transactions. The Account Code field holds the number you assign to an account. Codes that appear in the Code field of the Checkbook, Payables, Worksheet, Stocksheet and the General Ledger files must agree with the Account Code in your Chart of Accounts file. As a safety measure most of these files have popup menus and other entry aids to install Account Codes. Both Worksheet and Stocksheet refuse to post UNcoded items to the Receivables file.
No single Account Code should appear twice! Unique numbers are what you want here. . Setting up and assigning your unique codes to the accounts, whether for a manual or computerized system, is the most critical and often the most time consuming and confusing step in establishing and setting up your chart of accounts. Each code and/or code segment should uniquely identify only one thing. If you were going to use an employee’s initials as a code to identify your employees you would probably eventually have a problem if you had any employees with the same initials.
On the other hand, if you used their social security number you wouldn’t encounter any problems because everyone has a unique social security number. Things change and your coding system should be designed to be able to easily expand and change to handle adding new codes (accounts, departments, products, employees, etc. ) and reporting requirements as your business grows without having to completely revise your coding system. Applying this characteristic to a chart of accounts would require your account coding system to have flexible user defined accounts that allows unlimited addition of new accounts
Example of a Simple Account Numbering System Using Block Coding with Numbers Eight Blocks of Numbers have been used to assign account groups based on the types of accounts in the following example. |Block Assigned |Type of Account | |100-199 |Assets | |200-299 |Liabilities | |300-399 |Owner’s Equity | |400-499 |Revenues | |500-599 |Costs of Goods Sold | |600-699 |Expenses | 700-799 |Other Revenue | |800-899 |Other Expenses | By separating each account number by several numbers, room is provided for adding additional new accounts. Each of our blocks allow a maximum of 100 accounts. The first digit (number) represents the type of account (asset, liability, etc. ). If the first digit (number) is a 1 this account is an asset. If the first digit (number) is a 2 it is a liability and so on. The block assigned for the type of account is used to assign account numbers to the individual accounts.
Examples Using the 3 digit numbers code structure: • The account Cash which is an asset account would be assigned a number using the block 100-199. 100 – Cash • The account Accounts Payable which is a liability account would be assigned a number using the block 200-299. 200 – Accounts Payable • The account Sales which is a revenue account would be assigned a number using the block 400-499. 400 – Retail Sales The above example clearly indicates why unique coding is done in chart of accounts. 5. Can we call a chart of account the map of accounting information system?