Part Two Preparing A Chart Of Accounts Answer Key
When it comes to managing a business, having a proper chart of accounts is essential. It helps to keep track of all financial transactions and ensures that everything is accounted for. In the previous article, we discussed the basics of preparing a chart of accounts. In this article, we will provide the answer key to Part Two of that process.
Step One: Determine the Accounts You Need
The first step in preparing a chart of accounts is to determine the accounts you need. This involves identifying the various categories of transactions that occur in your business. Some common categories include assets, liabilities, equity, revenue, and expenses.
Once you have identified these categories, you can then break them down into more specific accounts. For example, under the assets category, you may have accounts for cash, accounts receivable, inventory, and property. Under the revenue category, you may have accounts for sales, commissions, and interest income.
Step Two: Assign Account Numbers
The next step is to assign account numbers to each account. This helps to keep everything organized and makes it easier to find specific accounts when needed. There is no standard for assigning account numbers, but it is important to be consistent throughout the chart of accounts.
One common method is to use a numbering system that reflects the account's category. For example, all asset accounts may start with the number 1, all liability accounts may start with the number 2, and all equity accounts may start with the number 3. Within each category, accounts can be numbered sequentially, such as 101, 102, 103, and so on.
Step Three: Determine the Type of Account
The third step is to determine the type of account. This refers to whether the account is a balance sheet account or an income statement account. Balance sheet accounts are those that show the financial position of the business at a specific point in time, such as assets, liabilities, and equity. Income statement accounts are those that show the financial performance of the business over a specific period of time, such as revenue and expenses.
Step Four: Determine the Normal Balance
The fourth step is to determine the normal balance of each account. This refers to whether the account's balance should be a debit or a credit. For example, assets and expenses have a normal debit balance, while liabilities, equity, and revenue have a normal credit balance.
Step Five: Organize the Accounts
The final step is to organize the accounts in the chart of accounts. This involves grouping similar accounts together and arranging them in the proper order. One common method is to organize the accounts in the following order:
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
Within each category, accounts can be arranged in alphabetical order or in order of importance.
Conclusion
Preparing a chart of accounts may seem like a daunting task, but it is essential for the proper management of a business's finances. By following these steps and using the answer key provided in this article, you can create a chart of accounts that is organized, accurate, and easy to use.