14 September 2011

Chart of Account

Chart of account is account codes and account names to be used to record transaction journal. This blog does not discuss various types of chart of accounts theory. This blog will only explain an ideal chart of account based on experience or practice and is very useful for user at the clerical level. As you know, day to day activities related with chart of account mostly used by user, in this case, employee at the clerical or staff level. At the supervisory or managerial level, chart of account is very important also, but they never involved directly in the daily recording transaction journal as the clerical staffs do. In addition, at the supervisory level and above, user usually are able to understand accounting system easily so that they can remember the account code without using any supporting tool.

The charts of account used in this blog are at the detailed level. Grouping of each detail chart of account is done at the time of financial reporting. For easily understood, consider the example below.

Group assets:
Sub group 1 : Current Asset:
Sub group 2 : Cash and Bank
Sub group 3 : Cash
Detail : Cash – central
Detail : Petty cash
Sub group 3 : Bank
Detail : Bank A
Detail : Bank B
Detail : Bank C

In the above example, account at level of group and sub group are used for financial reporting only, and not used for entering the transaction journal. We are using account at detail level for entering the transaction journal.

The ideal charts of account

There is no such an ideal chart of account, but based on my experience and best practices, we can make charts of account using several columns, each has two to three characters length (alphabet, numeric or both). Now, how many column is needed? Well, it depends on the business line and scale of the company. For small scale companies, two columns are enough, while middle up companies, at least three columns are needed. For more convenient, we take the example as follows:

  • The first column: a chart of accounts to be used as a basis for making financial reports. This column is called the main account.
  • The second column: a chart of accounts derivatives 1 (derivatives accounts) that is used for the purposes of the organizational structure. Examples: Department of Finance, HRD, Production, and so on.
  • The third column: a chart of accounts derivatives 2 (derivatives accounts) that is used for profit center or cost center. For example: product line, project, and so on.

Now, suppose a company has two main accounts: 01 and 02, 2 accounts derivative 1: department 01 and 02, and two accounts derivative 2: The product line 01 and 02. Then the maximum possible number of accounts created is a combination of all three items in the account, namely:

Main Account         Accounts Derivatives 1      Accounts Derivatives 2
     01                                        01                                        01
     01                                        01                                        02
     01                                        02                                        01
     01                                        02                                        02
     02                                        01                                        01
     02                                        01                                        02
     02                                        02                                        01
     02                                        02                                        02

Or 2 x 2 x 2 =8

In practice, a company must have more than two main accounts, more than two accounts derivative 1, and more than 2 accounts derivative 2. So, suppose a company has 500 main accounts, 15 accounts derivative 1, and 5 account derivative 2, then the combination or the maximum number of accounts created is as much as: 500 x 15 x 5 or as many as 37,500 accounts! A clerical staff would not be able to remember all that accounts, except by breaking it into 3 parts (columns). By breaking it into 3 columns, then he only needs to remember the derivative accounts as many as 15 + 5 or equal to 20, very easy to remember. While the main account of 500 pieces, if they made in an organized manner, it also does not take long to remember.

To understand more about chart of accounts, we can use MS Access as a simple relational database example. MS (Microsoft) Access is the easiest way to learn about relational database. It provides many useful feature such as creating form, report, query, and visual basic for application. It also can be integrated to MS Excel and MS Word as well, so that we can make report using spread sheet or word processing to create customized report easily. Further, we will learn programs like MS Access database application, for more details, please open the following link.

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