The Chart of Accounts

The Chart of Accounts shows each account that a business uses in its financial transactions. It also lists the account number and generally a description. Although it is a simple list, it can be very lengthy because most companies have dozens, if not hundreds, of accounts.

An account’s purpose is to give you a way of tracking financial data of the business. The larger the business, the more granular you want to track your financial information. For large corporations, accounts can even be duplicated across different business divisions and geographical locations. Thus, each account number can be quite lengthy and broken into segments. On the opposite end of the spectrum is my consulting business. Although my software package lists dozens of accounts for my business, I certainly don’t need to track international divisions and I’m fine with an account number that is just four digits long.

Account numbers are listed in ascending order based on liquidity. Liquidity is defined as how fast something can be converted to cash. The faster you can receive cash for something, the more liquid it is. The most liquid accounts are listed first with the least liquid being last.

Let’s look at the liquidity of two assets: checking accounts and inventory. Checking accounts are very liquid because you could drive to the bank and withdraw your money immediately. The account numbers for bank accounts could be in the range of 1100-1200. Inventory is not very liquid because you have to wait until someone buys it before you get cash for it. This could take weeks or even months. Inventory account numbers could be in the range of 1800 or 1900.

A benefit of having accounts numbers ordered by liquidity is that this makes it easy to write financial reports. Corporations like to see the most liquid accounts shown first and all you have to do is sort by account number.