The importance of a chart of accounts is primarily the framework of accounts that keep revenue, expenses and other data organized and ready to generate a financial statement. The chart of accounts is used to identify transactions that are recorded in the company’s general ledger.

One of the first things is to set up the accounts based on how you want to view the financials and not the tax accountant. The tax accountant will be able to adjust the financials that fit best for the tax return, however; you still need to be able to review the financials and make business decisions. There are five main categories of accounts which are the following:

1. Assets (What the company owns)
2. Liabilities (What the company owes present and future)
3. Owner’s Equity (The owner investments in the company)
4. Revenue (Money the company receive from products/service rendered)
5. Expenses (Money spent to operate the company)

When creating these accounts, utilizing a numbering system that’s logic and easy to remember can make the chart of accounts more organized. A well-organized chart of accounts would have appropriate groupings that can be identified in levels. The four levels that should be used are as followed:

• Level 1 – Expenses
• Level 2 – Grouping expenses in 3 main categories (General Admin, Sales and Marketing, Research and Development)
• Level 3 – Each have no more than 10 accounts
• Level 4 – Subcategories

For an example, there can be an expense account under General as Insurance. Insurance can have subcategories of medical insurance, business liability insurance, workers compensation, and etc. Generating a numbering system would showcase the example account as followed:

1. 5000 - Expenses
   1. 5100 - General and Administration
      1. 5105 - Insurance
         1. 5105.5 - Medical Insurance
         2. 5105.10 - Business Liability Insurance
         3. 5105.15 - Workers Compensation

The Chart of accounts is the backbone to a company’s finances. Having an organized chart of accounts will eliminate have ledger account in a mess which would make generating a report impossible.