Practical Resources: Financial Management by Debra L. James, EA

Creating a Chart of Accounts

One of the things we learn about in accounting 101 is a chart of accounts. In simple terms, a chart of accounts is a list of assets, liabilities, owner’s equity, income sources, and expense categories.

First, let’s talk about balance sheet items. Assets may include bank account balances, inventory, and equipment. Liabilities are amounts owed to others such as accounts payable, loans, payroll taxes, and sales tax collected to name a few. Names for equity accounts vary depending upon the entity type. For instance, in a corporation, we would see the value of stock, paid in capital, and retained earnings.

Now let’s turn to income statement items. At the top of an income statement, we would see income. As a business owner, you may want to see various income sources broken down. For instance, if you own a grocery store, sales from groceries, sales from lottery tickets, sales from deli items, etc. Directly underneath sales, we will see cost of goods sold. In the grocery store, we may see cost of groceries, deli items etc. This section can be detailed or as simple as listing sales as a general category, and cost of goods sold as such or purchases. The bottom line is that we show gross income less cost of goods sold and the end result is gross profit. Gross profit is profit before operating costs.

The next section of the income statement is operating costs. They consist of all costs incurred that are not the cost of goods sold. Examples include advertising, telephone, office supplies, dues and subscriptions, and postage to name just a few. Ordinarily, these items are listed in alphabetical order. The total expenses are tallied at the end of the list with the title “total operating costs.”

The last line of the income statement is net profit, which is the gross profit less total operating costs.

Debra L. James, EA is an accountant and owner of Genesis Accounting & Management Services in Amherst, Ohio. She is in her seventh year in her accounting practice following an accounting and business career spanning the last 25 years. She can be contacted at genesisacct@yahoo.com