Each accounting element comprises of several accounts. These accounts are the name or title assigned to the varied forms of values received and parted with. In order to have one name for each similar values of one item only, an account title or account name is given--this is to maintain the uniformity of account name being used for similar values with the same character or quality.
So, companies usually maintain a listing of account names or account title for each accounting element. Such listing is called Chart Of Accounts. In this chart, each account is arranged according to accounting element and usually arranged in financial statement format which normally starts with assets, then followed by liabilities, then capital or equity then revenues then expenses. Note that accounts must be in alignment with the nature of the business. Meaning, we do not say sales when the revenue source is service or rental but we say service income or rental income.
Every account under each accounting element is assigned an account number. For sole proprietorship business, account numbers are simply coded meaning only few numbers are assigned unlike partnership and corporation where accounts numbers are sometimes more than 10-digits. Normally, for sole proprietorship, assets are assigned with numbers 1 and 2, liabilities with 3 and 4, capital with 5, revenues with 6 and 7, and expenses with 8 and 9.
Below is a sample of Chart Of Accounts:
Note: When journalizing and posting entries always refer to chart of accounts in order to ensure which account title to debit or credit.
