Bookkeeping – Chart of Accounts Using the Numbering System (Lesson 18)

To identify offsets, parenthesis is used with the final report read by owners and the management team.

Up to this point in this series about bookkeeping only accounts (ledgers) by name have been mentioned. To speed up the process of entering information accountants convert names to numbers. This makes it easier to enter information in the original journals. Instead of long hand-written words for the particular ledger, you simply enter a number.

 

Core Numbering System

Thus, a numbering system was developed around the six types of accounts. The primary digit indicated the type of account. See the following schedule:

   Assets              – 1
   Liabilities        – 2
   Equity              – 3
   Revenue           – 4
   Cost of Sales    – 5
   Expenses          – 6

The minimum number of digits is three and often I’ve seen six digits. The most common is a four digit code. Read the digits from left to right. Let’s explore the second digit in this numbering system. Each account type expands into account groups. For example, assets are divided into three major groups:

 *  Current
 *  Fixed
 *  Other

The second digit in this system identifies the particular group of assets as follows:

  Assets – 1
      Current Assets – 0 through 4
      Fixed Assets    – 5 through 7
      Other Assets    – 8 through 9

To clarify, if you are identifying other assets, the first two digits of the account number would be either 18 or 19. In a well organized set-up, the first two digits for other assets are tied to certain types of assets as described below:

Other Assets
     18 –  Non governmental investments or rights such as organizational costs, refinancing expenses, goodwill, purchased legal rights
     19 –  Governmental purchased rights such as patents, copyrights, licenses, branding, logo and judicial claims

Now let’s explore the third digit. Suppose a contractor purchased several lots and holds back one lot to build on in two years.  This is a non governmental investment so it ends up in the 18 area.  To elaborate, let’s break this down further:

Assets                                              – 1
  Non Governmental Investments     – 8
       Organizational Costs                    – 1
       Refinancing Expenses                  – 2
       Physical Assets                             – 3 through 5
       Private Legal Rights                     – 6
       Goodwill                                       – 7
       Franchise Contract                        – 8
       Other                                             – 9 

In the case of this lot the first three digits of its account number will be 183 to 185.  Can it get more detailed?

Yes it can. The two following examples illustrate how the numbering system goes to the fourth digit.

Using the same contractor purchasing lots, he purchases three lots for future construction. One lot is located in a subdivision known as Cripple Creek and the other two are in an area identified as Governor’s Land. How is the numbering system formatted?

   Assets                             – 1
     Non Governmental         – 8
         Land                                – 5
            Cripple Creek                 – 2
            Governor’s Land             – 7

The account number for the lot purchased in Cripple Creek is 1852 and the two lots in Governor’s Land are entered into account number 1857.

Another example uses refinancing of a real estate bond for an apartment complex in Missouri.  Here is the existing the four-digit structure:

  Assets                          -1
    Non Governmental      – 8
        Refinancing                – 2
            Missouri                    – 7

This business may have complexes in eight states representing digits 1 through 8 and the number 9 is simply left open for future use. Therefore, the bond refinancing would be posted to account number 1827 which means asset, non-governmental, refinancing in Missouri.

This numbering structure exists throughout the entire chart of accounts. Let’s discuss practical application.

Practical Application

It has been stated several times throughout these lessons, one of the most common mistakes bookkeepers make is having too many accounts. Think about this for a moment, with a four digit number you could literally end up with 9,999 accounts. For your average small business, this is more than enough. The author has reviewed the account structure for operations with over $5,000,000 in revenue and they get by fine with less than 200 accounts, they actually had less than 120 accounts. If a business operation is doing less than $1,000,000 per year in sales, they should not have more than 100 accounts.

Once an operation gets to a sales volume of more than $10 Million you may consider expanding to a five-digit numbering system. Most likely it will not be needed but it can be considered.

WITH SMALL BUSINESS, USE A THREE OR FOUR-DIGIT ACCOUNT NUMBERING FORMAT.

 

 

 

 

To assist you in your set-up, the following identifies the first two digits for each of the six most account types and their corresponding groups:

 Assets
   11 – Cash
   12 – Accounts Receivable
   13 – Inventory and Work in Process
   14 – Other Current Assets such as prepaids
   15 – Fixed Assets at cost
   16 – Accumulated Depreciation
   17 – Open
   18 – Non Governmental Investments
   19 – Governmental Investments

  Liabilities
    21 – Accounts Payable
    22 – Credit Cards and Charge Accounts
    23 – Taxes Due
    24 – Lines of Credit
    25 – Unearned Revenues Including Progress Billings
    26 – Open
    27 – Long-Term Debt Tied to Fixed Assets
    28 – Long-Term Debt Unsecured
    29 – Open

  Equity
    31 – Stock and Capital Paid in Excess
    32 – Partnership Capital Accounts
    33 – Open
    34 – Open
    35 – Retained Earnings
    36 – Distributions/Dividends/Draws
    37 – Open
    38 – Open
    39 – Open

  Revenue
    41 – Sales
    42 – Returns, Allowances, Discounts
    43 – Open
    44 – Specialized Sales such as service or contracted income
    45 – Open
    46 – Open
    47 – Other Revenue
    48 – Interest on Working Capital
    49 – Open

  Cost of Sales
     51 – Prime Costs such as materials
     52 – Prime Costs such as labor
     53 – Prime Costs such as outside services (subcontractors)
     54 – Prime Costs – Other
     55 – Open
     56 – Internal Costs Transferred to Cost of Sales (depreciation/amortization)
     57 – Indirect Costs such as project management
     58 – Open
     59 – Open

  Expenses 
     61 – Administration Management Payroll
     62 – Administration Office Staff Wages
     63 – Administration Employee Benefits and Taxes
     64 – Admin Training
     65 – Admin Travel
     66 – Open
     67 – Open
     68 – Open
     69 – Open
     70 – Facilities
     71 – Insurance
     72 – Taxes and Licenses
     73 – Communications
     74 – Open
     75 – Office Operations
     76 – Outside Services including professional
     77 – Working Capital Costs such as banking and interest
     78 – Depreciation and Amortization
     79 – Open

In general, account numbers starting with an 8 or 9 are designed for other expenses and revenue which are explained in the next lesson.

Practical Application with QuickBooks

QuickBooks allows the bookkeeper to use the numbering system when setting up the chart of accounts. Click on ‘Lists‘, then ‘Chart of Accounts‘ and at the bottom, click on the word ‘Accounts‘. Hit ‘Add a New Account‘ or ‘Edit an Account‘. The account’s detail information card is displayed. Up in the right hand corner is the field to add an account number. Please try to adhere to the three or four-digit numbering system.

Summary – Chart of Accounts

Accountants use a numbering system to speed up the process of entering data into the journals and transferring information to the respective ledgers. The number system is tied to the six types of accounts for the first digit. The second digit refers to a more defined section of the type of account. The remaining digits provide flexibility in meeting the information needs of the respective business. ACT ON KNOWLEDGE.