Chart of accounts: step by step to create yours

Your ability to understand the economics of your company will determine how successful it is. In this sense, creating a chart of accounts is an essential step in managing the finances of your business and achieving resource transparency.

Are you curious about what constitutes a chart of accounts, how it functions, and why it matters? For an easy-to-follow guide on creating your company’s chart of accounts, check out this page.

A chart of accounts: what is it?

This standardized data collection documents the financial movements of the firm, including its assets, liabilities, revenues, expenditures, expenses, and investments. This well-structured document codes and categorizes each account.

The chart of accounts may be used to get a comprehensive understanding of the company’s financial situation and to compile information that will be used to create the accounting papers for the firm.

What is a chart of accounts for?

The chart of accounts serves to provide an accurate overview of the company’s resources and is also used to prepare the balance sheet, cash flow, Income Statement (DRE) and Business Budget.

Furthermore, through the document, the entrepreneur can better understand the company’s results, as he has at hand detailed and standardized information on financial operations, such as accounts payable, accounts receivable, assets and others.

How important is the chart of accounts for your company?

This is a crucial tool for business owners because it gives them the ability to assess the financial health of their organization, make decisions with assistance, and assess the success of their venture with hard facts.

Additionally, with a chart of accounts template, you have transparency regarding resources, such as working capital , and important information for financial planning for your business.

Types of charts of accounts

Entrepreneurs need to know that there are 3 types of chart of accounts, each with a different function. Follow along.

Reference Chart of Accounts

It is the Revenue Reference Chart of Accounts (PCRR), a structure created by the Federal Revenue Service that establishes a standard for classifying company accounts. Through it, it is possible to inform the accounting balance in the Fiscal Accounting Records (ECF).

Accounting Chart of Accounts

Every financial and economic transaction made by the organization is shown in detail in the accounting chart of accounts. It serves as the foundation for other accounting records, such financial statements, and must be created in compliance with accounting rules and principles.

Management Chart of Accounts

Here we have the most practical chart of accounts, used by entrepreneurs to understand their business accounts more clearly. Thus, it is less detailed than the accounting plan and can be customized according to the company’s needs.

What should the structure of the chart of accounts be like?

The structure of a chart of accounts should contain the following groups of information. See below.

Assets

These are the accounts that participate in the company’s assets, divided into:

• Unlike current assets, which may be converted into cash rapidly, non-current or fixed assets, such real estate and machinery, may take longer to
• turn into cash. Investments, inventories, and accounts receivable are a few types of current assets.

Liabilities

These are the accounts that the company owes, such as debts and other obligations, and are divided into:

• current liabilities: debts that need to be settled during a business’s 12-month fiscal year, such taxes and supplier payments;
• non-current liabilities: bills that can be paid over a period longer than the company’s fiscal year, such as bank loans ;
• Net worth: equity of the company’s partners in a period.

Revenues

It is all the money that comes into the company, such as accounts receivable , payment for a product or service, or income from some financial investment.

Expenses

These are the expenses that the company has to maintain its activities, such as salaries, commissions, rent, accounts payable and others.

Costs

These are the costs—such as labor—that the business bears in order to sell a good or render a service.

How to set up the chart of accounts?

To structure the chart of accounts, you must follow the step-by-step instructions:

1. Gather all the company’s accounts, such as income, expenses, investments and costs;
2. Separate the accounts into categories or groups, such as Assets and Liabilities (representing the company’s positive and negative equity) and Income and Expenses (representing the income statement accounts);
3. Name the accounts that have already been categorized so that this is standardized across all sectors of the company;
4. After assembling the chart of accounts template, enter the information according to the categories created.

Chart of accounts example

It is worth noting that the chart of accounts needs to be customized to meet the particularities of each company. Therefore, having a template can help in structuring the document, however, adjustments must be made.

Check out an example of a simple chart of accounts for a store below:

1. Active

1.1. Box

1.2 Financial applications

1.3 Stock

1.4 Items for sale

1.5 Equipment

1.6 Real Estate

2. Passive

2.1 Taxes

2.2 Accounts payable (suppliers)

2.3 Bank loans

2.4 Payroll

3. Costs and expenses

3.1. Cost of materials

3.2. Labor cost

3.3. Administrative expenses

3.3.1. Rent

3.3.2. Internet and telephone

3.3.3. Electric energy

3.4. Financial Expenses

3.4.1. Bank charges

3.4.2. Passive interest

4. Revenues

4.1. Sales revenue

4.1.1. Sale of products in cash

4.1.2. Sale of products on credit

4.2. Financial Income

4.2.1. Investment income

What are the most common mistakes when preparing the chart of accounts?

It is important to have the help of an accountant to prepare the chart of accounts so that the structure is complete. Below, see the most common mistakes when putting together the document:

• not knowing which category each account fits into;
• fail to standardize account nomenclature;
• not organizing information hierarchically;
• not considering important company indicators when detailing the chart of accounts.

It is important to enter the information in the appropriate field to be able to carry out a complete financial analysis and to have accurate data to prepare other accounting documents.