In a chart of accounts, the accounts are organized into a tiered structure, usually expressed in a four-digit number. There are two different basic principles of order for the most common account standards. The structure of this process is distinguished from financial statements (or balance sheet breakdown):
- Process outline: The accounts are sorted in order of operational processes. For example, the receipt of goods is preceded by the yield.
- Closing structure principle: These accounting frameworks are based on the necessary breakdown for balance sheets and profit and loss accounts.Therefore, the items, assets, and liabilities in the annual financial statement followed by income and expenses are discerned from the profit and loss account.
In order to set up a chart of accounts using an accounting standard, a company accountant must first define the various business accounts and assign a different number to each account. Depending on the size of your company, three or four numbers may be sufficient, but it is worth remembering that if you anticipate new accounts, and further sub-accounts being created in the future, starting with a three or four-digit number will give you more room to expand and add extra accounts later on. Adding more detail to your account labeling at the start requires more effort but is sure to save time and work down the line. Be sure to number your accounts in a logical way – accounting firms document practical frameworks for this.
Company accountants must remember that there are certain legal requirements concerning accounts and tax reporting. The Internal Revenue Service (IRS) demands that travel, entertainment, and advertising (as well as several other) expenses should be recorded in separate accounts. It is worth consulting with a tax professional to ensure that your company adheres to federal or state accounting regulations.