The Importance of the Chart of Accounts in Accounting
The term chart of accounts means the list of accounts that are used by the company. This list can be alphabetic, numeric or even alpha numeric. The accounts should have the header as well as the structure that is easy to understand in order to consistently post the transactions. In order the ledger to be easily identified, it is necessary that each nominal ledger should be unique. The arrangement in the chart of accounts is such that it corresponds to the appearance in the financial statements.
There are mainly six types of accounts that are:
- Asset Accounts: The various types of economic resources that are owned by the company or the business like the cash in bank, cash, accounts receivable, building, cash, inventory, prepaid rent and even goodwill.
- Liability Accounts: The economic commitments that a company owes fall under the category of liability accounts. For instance the accounts payable, bonds payable, accrued interest etc.
- Equity Accounts: This includes the remaining equity of the company that is left after all the liabilities have been deducted from the assets
- Expense Accounts: It represents the company’s expenditure that is accrued in order to carry out its operations. Interest, insurance, rentals, depreciation, doubtful accounts etc.
- Revenue Accounts: It represents the company’s gross earnings and is like service revenue, sales, as well as the interest income.
- Contra- accounts: This includes the deductions from a relatively permanent asset.
The chart of accounts is one of the most powerful tools in the hands of the accountants as well as the companies. It has been observed that the properly maintained chart of accounts can be really helpful in keeping the financial health of the company in good stead. Another thing that needs to be taken into account is the fact that the chart of accounts is the collection of the individual nominal ledger accounts.
However, the executives are given stock options to compensate the loss in their salary but this was not expensed on the corporation’s books. Ultimately, the net income of corporation would increase to a large amount in comparison to the previous year. You can also consider it as almost free money, because the corporations still have to pay their executives but they don’t have to record the money as an expense to the business. So, take the help of accounting for stock options to assess and evaluate the profitability of such activities.