In the formal recording of business transactions and events, it is customary to provide a guide to the accounting assistant or bookkeeper. A chart of account is prepared for the use of accounting staffs. As the accountant prepares two main accounting report, the balance sheet and income statements or statement of business operations then the accounts should be classified in the chart according to the statements wherein they appear. Thus, there are balance sheet accounts and profit and loss accounts.
In preparation of a chart of accounts covers the following: determination of what specific accounts are required and selection of appropriate and descriptive titles for the accounts.
The specific accounts required will depend on the nature of the business. The nature of the business will give an indication of the transactions to be undertaken. After the determination of what accounts are to be used, then the next step will be selection of titles descriptive enough to convey the nature of the account.
Asset titles - examples are cash, accounts receivable, notes receivable, merchandise, supplies on hand, marketable securities, land, buildings, equipment, furniture and fixtures, office equipment and etc.
Liability titles - examples are accounts payable, notes payable, taxes payable, bonds payable and etc.
Proprietorship titles - examples are Owner's capital or equities, owner's drawing etc.
Income titles - examples are sales, revenue, fees, rent income, service income, interest income and etc.
Deduction from income titles - examples are cost of sales of cost of goods sold, salaries, supplies, insurance, taxes, utilities, repairs, and etc.
- it is the accounting book wherein the business transactions are recorded for the first time. It is also called the book of original entry. There are various kinds of journal books some are cash journal, sales journal, purchases journal, and the general journal. The number of journals to be used in every business is dictated by the size and needs of the business.