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How to set up the chart of accounts

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How to set up the chart of accounts

The chart of accounts is the first stage of designing any accounting system, sometimes called a manual of accounts, and requires the accountant to give a number to each account to indicate it. Each company organizes and divides its the chart of accounts according to its activity and size.

Because it is difficult at first for the new accountant to understand the arithmetic tree, divide it, and how it works. At ECPA, we decided to dedicate this article to explain the chart of accounts in an easy and fun way, God willing.

First, let's start learning about the chart of accounts and its meaning.

What is the chart of accounts?

The chart of accounts plans to prepare financial statements for all accounts within the company. It is designed to facilitate understanding for business owners and auditors about the establishment’s financial transactions during a specific period. As we said, it is the most critical stage in designing the accounting system.

The chart of accounts includes all company accounts, whether balance sheet accounts (financial position list) or income list such as assets, equity, revenues, expenses, liabilities, etc. and vary from one entity to another according to its chart account.

The chart of accounts is based on giving each account a name, number, and description. The accounts of the financial position list are planned initially, and then income list accounts. Of course, the Accounts Manual plays a significant role, whether for the accountant, the employer, or the government bodies directly. 

What is the importance of a chart of accounts?

The importance of the chart of accounts can be limited to:

First, an illustrated picture of the company's financial situation makes it easier for business owners and specialists to assess its financial performance at any time.

An attraction for new investors to contribute to the company.

Helps facilitate the preparation of financial records and reports.

It helps business owners and managers understand and track money issued and received to and from the company.

Shows the operations carried out by the company and what is being carried out.

It makes it easier for accountants and tax officials.

The chart of accounts measures how successful or failed a company was during a past accounting period.

Enables officials to develop appropriate growth plans.

Help determine the size of additional investments suitable for the company in the coming period.

It enables officials to develop appropriate plans to control debt.

Indirectly, it contributes to the development of plans to rationalize spending, explaining the frequent places of spending money such as maintenance, rents, etc., enabling officials to hamper the extent to which money spent can be reduced. 

How to design the chart of accounts?

We said in advance that the chart of accounts includes all company accounts, and therefore each account will include many sub-lists that fall under it. For example, the financial position list includes asset accounts. In addition, many accounts and sub-lists include cash, receivables, prepaid expenses, fixed assets, accumulated depreciation, securities, small amounts, etc.

Liability accounts also include payment papers, accounts payable, wages payable, taxes payable, accrued liabilities, and others. As for shareholders' rights, they include retained profits, premium shares, common shares sold, and so on.

To design The chart of accounts, the accountant creates the main accounts and work accounts mentioned in advance and categorizes them to show them in a specific way within reports. Then the primary chart of accounts levels are created, which are made according to known Egyptian standards.

The accountant collects all the accounts he has arranged within the chart of accounts, links each account to the level under which it falls, and then determines the nature of each account.

As we said, a number is given to each account, and there is a prevalent arrangement for companies where specific numbers are given to each account as follows:

Assets: It was given the numbers from 1000:1900.

Liabilities: And he grew to give it the numbers from 2000:2900.

Revenue: It was given the numbers from 4000:4900.

Expenses: It was given the numbers from 5000:5900. 

The basic levels of the chart of accounts

There are many models of accounts used in the chart of accounts, and therefore, the levels of the accounting manual may reach five levels, but there are three primary levels within the chart of accounts carried out by Egyptian standards. We will review with you today, as follows

Level 1: It includes:

● assets. ● Liabilities. ● Property rights. ● Costs. ● Revenue. ● Expenses.

Level 2: The accounts mentioned in the first level are divided as follows:

● Assets: Assets include current assets and long-term assets. ● Liabilities: It includes two types, namely, current and long-term Liabilities. ● Equity rights: It includes profits, capital, and reserves. ● Costs: It includes sales and income costs, operating expenses, costs charged to carry out manufacturing, and production depreciation. ● Revenue: It includes income from the activity and other income. ● Expenses: It includes general administrative expenses, distribution, sales and marketing expenses, and financing expenses.

Level 3: It is the last primary level in the chart of accounts in which accounts at the second level are divided as follows:

● Current assets are divided into inventory accounts, operations under execution, client accounts, receivables, subsidiaries and sister accounts, accounts of debtors, cash accounts, other debit balances, and others. ● Long-term assets: They are divided into fixed assets, projects under implementation, intangible assets, long-term investments, and others. ● Current Liabilities are divided into creditors, other credits, vendor accounts, payment papers, and control of purchase returns. ● The Liabilities are long-term and contain loans, funding, and deferred tax liabilities. ● Profits are divided into deferred profits and period profits. ● Capital is also divided into paid capital. ● For reserves, the following are the precautions that are avoidant. ● Sales and revenue costs include the cost of exchange for the store. ● Operating expenses include expenses for the manufacturing activity and include operating fees and other operating expenses. ● Charged costs are divided into indirect industrial expenses charged, direct fees charged, and others. ● The cost of production depreciation includes the depreciation of assets related to production? ● Activity revenues include sales returns, discounts, and sales. ● Other income includes non-activity income such as waste sales revenues and capital profits. ● General administrative expenses have been divided into administrative wages and other administrative expenses. ● Sales, distribution, and marketing expenses are divided into sales, wages, and other expenses. ● Financing expenses are divided into loan interest expenses and financial leasing expenses.

the chart of accounts for e-commerce

With the advent and spread of e-commerce, many electronic accounting programs have emerged that help e-commerce workers implement the chart of accounts accurately and quickly.

However, despite the diversity of these programs, business owners are very much looking to access the best accounting software, as they need specific benefits that are not found in all these programs, such as billing, inventory management, and chart of accounts design.

So on our website, “Egyptian Chartered Accountants,” we will nominate you five of the best accounting programs.

The most crucial electronic accounting software

You can download a copy of the famous chart of accounts from this link, or you can download one of the following accountant programs:

  1. QuickBooks: The best accounting software, but it is available as a website and, of course, needs to connect to the Internet.
  2. Microsoft Small Business Accounting Software.
  3. Mayub program.
  4. Quick box.
  5. Simply Accounting program.

At the end of the article, I think we realized the significant role that the chart of accounts plays in the success of any business company, and our website “Egyptian Chartered Accountants” may help you understand it better.

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فريقنا - عطية حمدي

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