1. Project 4

1.6. Page 2

Training Room 2

Training Room 2: Chart of Accounts

 

A book being opened.

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What I Need to Know

 

Just as a book has a table of contents, the general ledger begins with a chart of accounts. Each account is similar to a chapter in a book, with a separate account number. 

 

Why Is This Important?

 

This makes it easy to see and to find exactly how much money is in each account. An account is a special page or a storage space on the computer used to record financial changes for each item affecting the financial position. For example, it records what each asset is worth or what is owed for each liability.

 

Recall that a balance sheet is divided into assets, liabilities, and owner’s equity. A chart of accounts is also divided into these sections. All assets begin with the number 1, all liabilities begin with the number 2, and all owner’s equity begin with the number 3.

 

chart of accounts: a list of the accounts of a business, and their numbers, arranged in numerical order

 

account: a page used to record financial changes for each item affecting the financial position


 

This makes accounts easy to locate since they are not only in numerical order, but the type of accounts are identifiable by the beginning number.

 

What Do I Need to Do?

 

A general ledger book with a Chart of Accounts

The accountant for a business, in consultation with the owner or manager, makes a list of the accounts that will best suit the needs of the business to make management decisions. For example, the accounts for a construction business are quite different from those of a hairdressing salon. From time to time, as business needs change, accounts are added or deleted as required. For example, the business might have started a charge account at a store and needs to open a new liability account to record that debt. For consistency when keeping the business records, the accountant may also develop rules about the type of transactions to be included in each account.

 

 

GAAP

2. The Consistency Principle

 

In the preparation of financial statements, the same accounting principles are applied in the same way in each accounting period.

 


Gurpreet Singh is still in the process of setting up his snow removal business. Let’s set up a chart of accounts for him by following the steps below.

 

Step 1

 

Recall the balance sheet for Gurpreet’s Snow Removal that you completed in the last training room. We will refer to this financial statement as we complete the Chart of Accounts.

 

 

You may find it helpful to view Alignment and Bold at this time.