The CHART OF ACCOUNTS is the way in which you systematically organize your accounting information.
Think of it as the FILING CABINET holding DRAWERS (Level One) into which you place FILE FOLDERS (Level Two) containing DIVIDERS (Level Three) holding financial information about your business.
Chart of Accounts = Filing Cabinet
Level One Accounts = Drawers
Level Two Accounts = Folders
Level Three Accounts = Dividers
The NAHB Chart of Accounts contains more than 400 line items. You will, however, use only the line items you need to manage your business finances. You can control which accounts show up on your reports by setting some line items to “Active” and others to “Inactive”. Most computerized accounting programs provide this feature.
If you are a spec builder, for instance, you will not need the “Rental Operations Expense” section, and will set that entire section to “Inactive”.
You will use all of the Level One accounts, but there will be Level Two or Level Three line items that you will not need. Those will also be set to “Inactive”.
The purpose of providing such a comprehensive Chart of Accounts is to make certain that a line item is available when needed.
In the interest of providing the most useful information, you will use only the line items you need, but will use all the line items you need.
Level One of the Chart of Accounts provides the skeleton of the financial reporting system. Think of this Level One as the drawers of the Accounting File Cabinet – one drawer for ASSETS, one drawer for LIABILITIES and EQUITY, one drawer for INCOME and DIRECT EXPENSE, and so on.
The 1000 series and the 2000 series comprise the Net Worth Statement.
(Assets = Liabilities + Equity).
The 3000 series through the 8000 series comprise the Income Statement.
(Income – Expenses = Profit).
The 9000 Series captures extraordinary income and expenses.
Level One Accounts provide an “INVESTOR” view of the business.
Level Two of the Chart of Accounts introduces more detailed categories for your accounting. The illustration to the left shows a partial list of the accounts available. For instance, the 2001-current liability line item has been segmented into 2002-Deposits by Customers, 2102-Accounts Payable, 2202-Notes Payable, and 2302 – Other Current Liabilities.
Think of Level Two of the Chart of Accounts as the file folders that go into the drawers of the Accounting filing cabinet.
The rationale behind this further categorization is that it is important for managers to know not only the size of the Current Liabilities but also how much of that is due to vendors (Accounts Payable) or how much represents Deposits by Customers on houses or work for which you have committed.
In the Current Assets section, the Receivables asset requires a different management approach than the Inventory assets. Therefore, it is important to know the relative size of each.
Level Two Accounts provide a “MANAGEMENT” view of the business.
Level Three of the Chart of Accounts drills down into the nitty-gritty of your business. Cash is broken into Petty Cash, bank accounts, and escrow accounts. Receivables are divided into sales receivables, investment receivables, draw receivables, etc.
Think of Level Three of the Chart of Accounts as the dividers in the folders (Level Two) in the drawers (Level One) of the Accounting filing cabinet.
The purpose of this kind of detail is to allow you, wearing your “department manager” or “analyst” hat, to easily follow the important financial activities of your company.
Level Three Accounts provide an “ANALYST” view of the business.
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