Overview of Accounting: Chart of Accounts, General Ledger,
Double-Entry Bookkeeping, and Account Types
Greetings! This tutorial provides an overview of the modern Accounting System and defines the four components of Accounting. They are: 1) the Chart of Accounts, 2) Double-Entry Bookkeeping, 3) the General Ledger, and 4) the five Account Types.
Author: Keynote Support
Accounting Structure: The Chart of Accounts
Most business owners and users of Accounting software are familiar with the Chart of Accounts. The Chart of Accounts is a list of all the accounts that are debited and credited when financial transactions are posted. Each account has a name and an account type. We discuss the five account types later in this tutorial. Though often optional, each account may also have an account number.
The Chart of Accounts is flexible in that new accounts can be added at whim. But the most efficient accounting systems maintain a lean Chart of Accounts. It is best to keep account names somewhat broad in scope and use subaccounts if more specific categories are needed for tracking purposes.
The Chart of Accounts is often referred to as the General Ledger accounts. We'll discuss the General Ledger later in this tutorial.
Below is part of a sample Chart of Accounts as displayed by QuickBooks. Notice that the account type is displayed for each account, along with an account number. The balance is displayed for some accounts:
Accounting Methodology: Double-Entry Bookkeeping
Before computers, bookkeepers logged financial transactions into paper journals specific to the type of transaction. At the end of the month, the bookkeeper or accountant transferred the totals from each journal to the General Ledger. The General Ledger was divided into the various accounts that we now call the Chart of Accounts, and the transactions were posted to these accounts using a method called double-entry bookkeeping.
In double-entry bookkeeping, each journal entry or transaction requires a debit and a credit of equal value. Typically, one account receives the debit and another account receives the credit, but the debit or credit can be split among multiple accounts. For more information, see Accounting: Making Sense of Debits and Credits.
At the end of the year, the bookkeeper calculated account totals, ran a Trial Balance to ensure the sum of the debits equaled the sum of the credits, prepared necessary reports, and filed the tax return.
Not much has changed, except today we enter transactions into Accounting software programs such as Intuit QuickBooks or Sage Peachtree Accounting. These software programs maintain a Chart of Accounts and follow double-entry bookkeeping standards.
Accounting Data: the General Ledger
The General Ledger consists of the Chart of Accounts, individual transactions, account balances, and the financial reports for a given accounting period. In other words, the General Ledger is the repository for all financial records and statements for a business for a particular time period.
As discussed above, the General Ledger is so named because it used to be a paper ledger that held this data. When an Accounting period was over, the accountant prepared the General Ledger reports. The two most important reports, the Balance Sheet and Income Statement (Profit and Loss Report), are discussed in Accounting Basics: the Income Statement and Balance Sheet.
The most popular Accounting software programs used today not only follow double-entry bookkeeping practices, but also maintain the General Ledger and provide a variety of reports, including the Balance Sheet and Income Statement (Profit and Loss Report).
Accounting Account Types: Assets, Liabilities, Equity, Revenue, and Expenses
Lastly, each account in the Chart of Accounts is classified as one of five account types. To fully understand how to post transactions and read financial reports, these five different account types must be fully understood. We'll define them here to complete our overview, but we recommend our tutorial The Account Types: Assets, Liabilities, Equity, Revenue, and Expenses for a detailed discussion.
- Assets: what the company owns of value (e.g. cash, equipment)
- Liabilities: what the company owes to others (e.g. loans)
- Equity: that portion of the total assets that the owners or stockholders fully own
- Revenue or Income: money the company earns from sales, and interest and dividends on marketable securities
- Expenses: money the company spends to produce goods or services (e.g. utilities, office supplies)
We hope this article has been helpful. Cheers!
Disclaimer:: Keynote Support is providing general information in a highly readable format as a service to the visitor. We have made every effort to provide information accurate as to the date of this article. Every customer environment and each transaction is unique, so please use the information and examples in this article only as a guide. In addition, the reader cannot infer from this article that Keynote Support is providing financial or accounting advice. Consult with a financial or accounting professional for assistance with your unique requirements.
Please link to this tutorial using the following HTML:
<a href="http://www.keynotesupport.com/accounting-double-entry-bookkeeping.shtml">Overview of Accounting: the Major Components</a>