What is a chart of accounts and how does it work in accounting?
Why are there so many different bookkeeping accounts and what are they telling us? How do you keep track of all the different numbers? You can get your answers here. The chart of accounts is actually more structured than you might think! You can get a better understanding of your bookkeeping and your company's finances by checking in on your chart of accounts.
What is a chart of accounts?
The chart of accounts is a list of the accounts used in bookkeeping. In Bokio we use a predefined chart of accounts, which you can find under Settings → Chart of accounts. It consists of four main groups that are the basis of your company's accounting:
- Assets
- Liabilities
- Income
- Expenses
Here, we can see where the money is going; either on the balance sheet report or the profit and loss report.
Balance sheet report
1xxx - Assets such as cash, bank and accounts receivable
2xxx - Liabilities
3xxx - Equity
Profit and loss report
4xxx - Income, for example, sales
5xxx-9xxx - Expenses, for example, the purchase of materials
The first number of the account tells which you type of account it is. Knowing what the first number indicates means that you can find the right account easily.
Balance sheet report
The purpose of a balance sheet report is to get an overview of how your financial position is on a given date. It shows the extent to which the assets are financed by equity or liabilities. In the balance sheet we find accounts beginning with 1, 2 and 3.
Assets - 00XX-1XXX
An asset is classified as a resource that is expected to give financial gains in the future or is something the company owns. They are divided into fixed assets and current assets.
Fixed Assets - 00XX or just XX
Fixed assets with account number 00XX or just XX are assets that are purchased for long term use (more than one year), such as buildings and cars.
Current Assets - 1XXX
Current assets with account number 1XXX are assets that will be traded within one year. For example, inventories, accounts receivable or cash.
Liabilities - 2XXX
Accounts starting with the number 2 are liabilities. Liabilities are divided into current (due to be paid within one year) and long-term (due to be paid more than one year ahead). Liability accounts that are often used are Trade Creditors (2100) and payroll liabilities (2210-2260). VAT (220X) is also reported as a liability and there are different accounts for the different VAT rates.
Equity - 3XXX
Equity is the difference between assets and liabilities, which can be seen as a debt to the owners.
Profit and loss report
A profit and loss report is a calculation of your income minus expenses during a financial year. They are reported under accounts starting with 4, 5, 6, 7, 8, 9. All numbers give you a clue about what it is for the type of income and costs.
Revenue - 4XXX
What you sell should be recorded to accounts that start with the number 4. You can see what you have sold and invoiced in your company here.
Expenses - 5XXX-9XXX
Compared to the revenue side, there are more expense accounts to choose from. These can be split out as per the following:
Direct Expenses or Cost of Goods Sold - 5XXX
Here you want to identify which purchases are part of your main business. For example, if your company sells cars, then all purchases of cars and accessories for resale should be posted under a 5XXX account, as all purchases made here should be resold in your business.
Payroll costs - 70XX
All costs related to employees, such as payroll costs and NI contributions, are recorded here. PAYE is also recorded under the 7XXX account.
Premises Expenses 71XX-72XX
The costs recorded under 71XX-72XX are usually for premises costs, property costs and consumables.
Motor Vehicle Expenses 73XX
The costs recorded under 73XX relate to costs of running a motor vehicle that is owned by the business.
Travelling Expenses 74XX
The costs recorded under 74XX are for the costs of travelling and entertainment.
Other Administration expenses 75XX-78XX
The costs recorded under 75XX-78XX relate to costs such as office supplies, telephone and other external costs.
Depreciation - 80XX
Value adjustments of fixed assets are recorded here. For example, it can be depreciation of cars, machines and other equipment.
Bad Debts - 81XX
The costs recorded under 81XX are any Bad Debts from Customers that you won’t receive or you are unlikely to receive.
Other or Sundry Expenses - 82XX
Here you record other general business expenses such as subscriptions and training.
Corporation Tax - 9000
Here you record your corporation tax expenses, this will be recorded per the liability on your corporation Tax return.
Bokio’s smart templates give you an automated way to record bills, invoices or purchases in the right accounts so you don’t have to worry about getting your bookkeeping wrong. You can easily check up on your company’s financial position with several reports in Bokio and use the chart of accounts for a more detailed breakdown of goods and services.
