I Like Accounting

Chart of Accounts

Lesson
Show/Hide Lesson

It can be very difficult to keep track of a firm's financials.

There's just so much going on!

For this reason accountants tend to group different financial information together.

It may be difficult to look at an account named Pens for instance.

  • Should the pens be considered part of inventory?
  • Should the pens be considered part of office expenses?
  • Should the pens be considered part of income?

Sure, we could force people to use very descriptive names, but wouldn't it be great if there was a system in place to make it easy?

There is! And it's called the chart of accounts. It's not totally standarized across countries, but we're going to look at a system common to many US companies.

Each account is assigned a unqiue number. Within a given firm, two journal entries that share the same account number are guaranteed to be from the same account.

Although the exact numbers used for a given account will differ at other companies, the selection of the first digit is broadly standardized.

Given the first digit, one can assume the broad account type of the account and vice versa:

First Digit of Account Number Account Type
1 Assets
2 Liabilities
3 Equity
4 Revenue
5 Expense
6 Gain
7 Loss
8 Income
9 Contra-accounts
Question Daniel Brown, an auditor at Sierra inc., is worried that the firm's accounts were all classified incorrectly. For this reason, he is asking you to reclassify various accounts.
There is a gain account.

What should we use for the account number's first digit?
Answer