A chart of accounts is the foundation of a record keeping system as it provides and orderly and logical list of every general ledger account in an accounting system. A chart of accounts is a unique set of codes used to record all transactions consistently. It is a list of all the accounts available in an accounting system to record journal entries with each account structure in a manner that enables the user to record for each type of asset, liability, shareholders equity, revenue and expense.
Accounts are usually listed in the same order as the financial statements commencing with the balance sheet and continuing with the income statement. Thus a chart of accounts begins with the cash accounts, then current assets and fixed asset accounts which are followed by the current liabilities and non-current liabilities. Next is shareholders equity then the income and expense items.
Each account in the chart of accounts is assigned a name and number showing classifications and sub-classifications. The chart of accounts acts as an index to locate a specific account within a general ledger. A properly constructed chart of accounts can be expanded and tailored to reflect ever changing operational needs.
An important purpose of the chart of accounts is to segregate assets, liabilities, shareholder equity income and expenses to ensure that those who read these statements can obtain a clear understanding as to the financial status of the party that is producing financial documents for either management reporting or to comply with statutory or other reporting obligations.