The Importance of a Chart of Accounts

The Importance of a Chart of Accounts

Many people do not view the chart of accounts as important. There are many reasons you should consider preparing the charts of accounts. A chart of accounts means a list of the classifications that is utilized to group and arrange your business transactions (Also see Three Simple Ways to Manage Your Bookkeeping).

The chart of accounts plays a vital role in your company accounting system. Based on the account types, those interested in recording transactions know where to show balances. In addition, those who prepare the financial statement require the details about the type of the account to know which financial statement (the Balance Sheet, Profit and Loss or cash flow) to add into that account.

Thinking about that the chart of accounts is the foundation of bookkeeping system, you would then either start preparing the chart of accounts or outsource an bookkeeping service in Johor Bahru to allow the professionals to do it for you.

It is easy and simple to set up the chart of accounts regardless of the complexity and size of your company. You can first list all the accounts that apply to your company. Do not panic if you cannot think of all the accounts you use to record business transactions; you can add an account to your chart of accounts anytime.

The essential thing is to make sure that each account is categorized properly. When preparing the financial statements, confusion happens when the incorrect account recorded in the wrong account type.

There are at least three columns in a chart of accounts:

1. Account column – record all the account names
2. Account type column – Income, asset, sales, expense, equity, liability (Also see The Difference between Assets, Liabilities and Equity)
3. Description – describe transaction that is recorded in a specific account

When setting up the chart of accounts manually, leave some space between the accounts for new accounts. If you use a digital accounting system, you do not need to leave such areas.

When you have prepared the chart, do not forget to disperse the modified list to all your staffs who might require the list when recording transactions. These staffs would examine the list, and if there is an account that is lost, they will give advice accordingly.

Reach out to an accounting firm in Johor Bahru for help if you are unclear when it comes to setting up a chart of accounts.

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