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Chart of Accounts

Every business needs a system to classify expenses.

The system for classifying expenses is known as the chart of accounts.  The chart of accounts is a system that numbers the account names that describe the nature of the expenditure. The same chart of accounts is used to also number the income accounts, as well as assets, liabilities and net worth accounts.  The chart of accounts serves:

  • The need to know how much is being spent by expense type.
  • The need to capture totals by type of expense for the tax return.
  • The need to provide the bank with financial statements.
  • The need for historical numbers to help in preparing budgets.
  • The need to compare actual results against a budget.
  • The need to compare this year’s results against last year’s results.
  • The need to know costs when calculating breakeven.
  • The need to determine whether you can afford a new hire.
  • The need to manage cash flow.
  • The need to determine where you can cut costs.
  • The need to compare results against industry results.
  • The need to track key performance indicators (KPIs).
  • And others.

There is no set numbering system that every business employs. And, unfortunately, accounting software programs do not provide good default systems. Each business should have the flexibility to build their own numbering systems. Most systems use a three-digit or four-digit number. The vast majority of small businesses can get by with three-digit numbers. The four-digit number adds a zero to the three-digit number.

There are many accounts that make up the total dollars in each of the above basic categories. Building a chart of accounts is a science—not an art. “Chunks” of numbers should be allocated to each basic category as follows:

Category3-Digit4-Digit
Assets100-1991000-1999
Liabilities200-2992000-2999
Net Worth300-3993000-3999
Sales Revenue400-4994000-4999
Direct Costs500-5995000-5999
Operating Expenses600-7996000-7999
Other Income/Expenses800-8998000-8999
Income Tax Expense900-9999000-9999

 

Other Income/Expenses are accounts that capture items outside your normal operations of selling goods or services. Examples include interest income, dividend income, interest expense, gain (loss) on disposal of assets. You are not in the business of earning interest and dividends, nor borrowing money, nor selling assets. That is why these items are classified below operating expenses as other income/expenses.

The reason for differentiating Direct Costs and Operating Expenses is to provide a break-out for determining Gross Profit as opposed to Operating Profit. This distinction is often needed to calculate breakeven sales. It is also a further “chunking” exercise.

Direct Costs may be defined as costs directly associated with the cost to manufacture, warehouse, distribute, deliver, or to consult, for a “line of business”. Direct Costs exclude selling, general and administrative expenses. Sales Revenue minus Direct Costs equals Gross Profit. A line of business may be represented as a product line, a service line, a consulting line, etc.

Operating Profit may be defined as Gross Profit minus total Operating Expenses, including advertising, marketing, selling, research and development, information technology, general and administrative expenses.

The attached expanded Income Statement illustrates “chunking” in action and “sorts out expenses”. It can be used as a Chart of Accounts for any business, including manufacturing, distribution and services. Not all accounts will be used if your business is in distribution or services. The 3-digit coding can accommodate two product lines; if you have more than two, use 4-digit coding which considerably expands the coding universe. Please note that service lines may be substituted for product lines. Also, if you prefer not to use the “Direct Costs” coding, simply use “Operating Expenses”. And within operating expenses, if you prefer, just use one salaries account to capture all salaries.

The coding (numbering) is there for you to use as you wish, or that which will accommodate your reporting needs. Remember, it is all in the coding. When you receive a vendor invoice or pay an expense item, the document that you pay must be coded with the system you are using. For example, if you allocate rent between Direct Cost (Plant 80%) and Operating Expense (Office 20%), 80% will be charged to Account # 570 and 20% to Account # 660.

Chart of Accounts
(Income Statement Format)

Account #CategoryAmount

Revenues

400Sales Revenue - Product Line 1xxx,xxx
401Sales Revenue - Product Line 2xxx,xxx
420Sales Returns & Allowances - Product Line 1(xxx,xxx)
421Sales Returns & Allowances - Product Line 2(xxx,xxx)
----------
subtotalTotal Sales Revenuexxx,xxx
----------

Direct Costs

Material
500Material Cost - Product Line 1xxx,xxx
501Material Cost - Product Line 2xxx,xxx
Tooling
520Tooling Cost - Product Line 1xxx,xxx
521Tooling Cost - Product Line 2xxx,xxx
Subcontracts
525Subcontract Cost - Product Line 1xxx,xxx
526Subcontract Cost - Product Line 2xxx,xxx

Labor and Benefits

530Direct Labor—product line 1xxx,xxx
531Direct Labor—product line 2xxx,xxx
535Indirect Labor—product line 1xxx,xxx
536Indirect Labor—product line 2xxx,xxx
540Overtime Labor—product line 1xxx,xxx
541Overtime Labor—product line 2xxx,xxx
545Payroll Taxes—product line 1xxx,xxx
546Payroll Taxes—product line 2xxx,xxx
550Employee Benefits—product line 1xxx,xxx
551Employee Benefits—product line 2xxx,xxx

Receiving

555Receiving Expenses—product line 1xxx,xxx
556Receiving Expenses—product line 2xxx,xxx

Shipping

565Shipping Expenses—product line 1xxx,xxx
566Shipping Expenses—product line 2xxx,xxx

Facilities

570Facilities Rentxxx,xxx
571Facilities Utilitiesxxx,xxx
572Facilities Insurancexxx,xxx
573Facilities Property Taxesxxx,xxx
574Facilities Securityxxx,xxx
575Facilities Maintenance & Repairsxxx,xxx
576Facilities Janitorialxxx,xxx
577Facilities Suppliesxxx,xxx
578Facilities Landscapingxxx,xxx
579Facilities Snow Removalxxx,xxx

Overhead

580Tools & Operating Suppliesxxx,xxx
581Equipment Rentalxxx,xxx
582Equipment Operating Leasesxxx,xxx
583Equipment Maintenance & Repairsxxx,xxx
584Workers’ Compensation Insurancexxx,xxx
585Liability Insurancexxx,xxx
586Telephonexxx,xxx
587Travelxxx,xxx
588Other Overheadxxx,xxx

Depreciation

595Depreciation Expense—product line 1xxx,xxx
596Depreciation Expense—product line 2xxx,xxx
597Amortization Intangibles—product line 1xxx,xxx
598Amortization Intangibles—product line 2xxx,xxx
subtotalTotal Direct Cost$ xxx,xxx

Gross Profit

subtotalGross Profit—product line 1$ xxx,xxx
subtotalGross Profit—product line 2xxx,xxx

Operating Expenses

Marketing
600Advertising$ xxx,xxx
601Promotionxxx,xxx
602Marketing Trade Showsxxx,xxx
603Marketing Conventionsxxx,xxx
604Marketing Expensesxxx,xxx
605Marketing Print Materialsxxx,xxx
606Marketing Salariesxxx,xxx
607Marketing Payroll Taxesxxx,xxx
608Marketing Employee Benefitsxxx,xxx
609Marketing Travelxxx,xxx
610Marketing Meals & Entertainmentxxx,xxx
Selling
611Sales Trade Showsxxx,xxx
612Sales Conventionsxxx,xxx
613Sales Expensesxxx,xxx
614Sales Print Materialsxxx,xxx
615Sales Salariesxxx,xxx
616Sales Commissionsxxx,xxx
617Sales Payroll Taxesxxx,xxx
618Sales Employee Benefitsxxx,xxx
619Sales Travelxxx,xxx
620Sales Meals & Entertainmentxxx,xxx
Research & Development
625R & D Expensesxxx,xxx
626R & D Salariesxxx,xxx
627R & D Payroll Taxesxxx,xxx
628R & D Employee Benefitsxxx,xxx
Information Technology
630IT Expensesxxx,xxx
631IT Salariesxxx,xxx
632IT Payroll Taxesxxx,xxx
633IT Employee Benefitsxxx,xxx
Training
640Training Expensesxxx,xxx
641Training Travelxxx,xxx
642Training Mealsxxx,xxx
Web Site
650Web Site Expensesxxx,xxx
Office Facilities
660Office Rentxxx,xxx
661Office Utilitiesxxx,xxx
662Office Insurancexxx,xxx
663Office Property Taxesxxx,xxx
664Office Securityxxx,xxx
665Office Maintenance & Repairsxxx,xxx
666Office Janitorialxxx,xxx
667Office Operating Suppliesxxx,xxx
668Office Scaping (Décor)xxx,xxx
General & Administrative Payroll & Benefits
670G & A Salariesxxx,xxx
671Officer Salariesxxx,xxx
672Bonusesxxx,xxx
673Employer FICA Taxesxxx,xxx
674Federal Unemployment Taxesxxx,xxx
675State Unemployment Taxesxxx,xxx
676Workers’ Compensation Insurancexxx,xxx
677Group Insurancexxx,xxx
678Pension Expensexxx,xxx
679Profit Sharingxxx,xxx
Other G & A Expenses
680Accounting & Auditing Feesxxx,xxx
681Auto and Truck Expensesxxx,xxx
682Bad Debt Expense (small balance write-off)xxx,xxx
683Bank Chargesxxx,xxx
684Business Mealsxxx,xxx
685Business Taxes (other than income & sales)xxx,xxx
686Cash Over and Shortxxx,xxx
687Charitable Contributionsxxx,xxx
688Computer Expensesxxx,xxx
689Dues & Subscriptionsxxx,xxx
690Entertainment Expensesxxx,xxx
691Equipment Maintenance & Repairsxxx,xxx
692Equipment Operating Leasesxxx,xxx
693Equipment Rentalxxx,xxx
694Gifts (business)xxx,xxx
695Insurance Expense (general)xxx,xxx
696Kitchen Expensesxxx,xxx
697Legal Feesxxx,xxx
698Licenses & Feesxxx,xxx
699Messenger & Delivery Expensesxxx,xxx
700Miscellaneous Expensesxxx,xxx
701Office Suppliesxxx,xxx
702Penalties and Finesxxx,xxx
703Postagexxx,xxx
704Printing Expensesxxx,xxx
705Professional Consulting Feesxxx,xxx
706Sales Tax Expensexxx,xxx
707Telephone—officexxx,xxx
708Telephone—mobilexxx,xxx
709Travel Expensesxxx,xxx
Office Depreciation
720Depreciation—office itemsxxx,xxx
725Amortization Intangiblesxxx,xxx
subtotalTotal Operating Expenses$ xxx,xxx

Operating Income

SubtotalOperating Income$ xxx,xxx

Other Income/Expense

800Interest Incomexxx,xxx
801Dividend Incomexxx,xxx
805Other Non-Operating Incomexxx,xxx
810Interest Expensexxx,xxx
815Other Non-Operating Expensexxx,xxx
850Gain on Disposal of Assetsxxx,xxx
855(Loss) on Disposal of Assetsxxx,xxx
subtotalTotal Other Income (Expense)$ xxx,xxx

Income Before Income Tax

SubtotalIncome Before Income Tax$ xxx,xxx

Provision for Income Tax

900Federal Income Tax Provision$ xxx,xxx
910State Income Tax Provisionxxx,xxx
subtotalTotal Income Tax Provisions$ xxx,xxx

Net Income

SubtotalNet Income$ xxx,xxx

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