The accounts that are used to sort and store transactions are found in the company’s general ledger. The general ledger is often arranged according to the following seven classifications. (A few examples of the related account titles are shown in parentheses.)
- Assets (Cash, Accounts Receivable, Land, Equipment)
- Liabilities (Loans Payable, Accounts Payable, Bonds Payable)
- Stockholders’ equity (Common Stock, Retained Earnings)
- Operating revenues (Sales, Service Fees)
- Operating expenses (Salaries Expense, Rent Expense, Depreciation Expense)
- Non-operating revenues and gains (Investment Income, Gain on Disposal of Truck)
- Non-operating expenses and losses (Interest Expense, Loss on Disposal of Equipment)
Balance Sheet Accounts
The first three classifications are referred to as balance sheet accounts since the balances in these accounts are reported on the financial statement known as the balance sheet.
- Balance sheet accounts
- Stockholders’ (or Owner’s) equity
The balance sheet accounts are also known as permanent accounts (or real accounts) since the balances in these accounts will not be closed at the end of an accounting year. Instead, these account balances are carried forward to the next accounting year.
Income Statement Accounts
The four remaining classifications of accounts are referred to as income statement accounts since the amounts in these accounts will be reported on the financial statement known as the income statement.
- Income statement accounts
- Operating revenues
- Operating expenses
- Non-operating revenues and gains
- Non-operating expenses and losses
The income statement accounts are also known as temporary accounts since the balances in these accounts will be closed at the end of the accounting year. Each income statement account is closed in order to begin the next accounting year with a zero balance.
The year-end balances from all of the income statement accounts will be combined and entered as a single net amount in Retained Earnings (a balance sheet account within stockholders’ equity) or in a proprietor’s capital account.
Note: If an account has not had any activity in the current or recent periods, it is often omitted from the current general ledger.
Chart of Accounts
The chart of accounts is simply a list of all of the accounts that are available for recording transactions. This means that the number of accounts in the chart of accounts will be greater than the number of accounts in the general ledger. (The reason is that accounts with zero balances and no recent entries are often omitted from the general ledger until there is a transaction for the account.)
The chart of accounts is organized similar to the general ledger: balance sheet accounts followed by the income statement accounts. However, the chart of accounts does not contain any entries or account balances.
The chart of accounts allows you to find the name of an account, its account number, and perhaps a brief description. It is important to expand and/or alter the chart of accounts to accommodate the changes to an organization and when there is a need for improved reporting of information.
In some accounting software, the chart of accounts is also used to designate where an account will be reported in the financial statements.