Chart of Accounts

The chart of accounts is a listing of all the accounts in the general ledger, each account accompanied by a reference number. To set up a chart of accounts, one first needs to define the various accounts to be used by the business. Each account should have a number to identify it. For very small businesses, three digits may suffice for the account number, though more digits are highly desirable in order to allow for new accounts to be added as the business grows. With more digits, new accounts can be added while maintaining the logical order. Complex businesses may have thousands of accounts and require longer account reference numbers. It is worthwhile to put thought into assigning the account numbers in a logical way, and to follow any specific industry standards. An example of how the digits might be coded is shown in this list:
Account Numbering

1000 - 1999: asset accounts 2000 - 2999: liability accounts 3000 - 3999: equity accounts 4000 - 4999: revenue accounts 5000 - 5999: cost of goods sold 6000 - 6999: expense accounts 7000 - 7999: other revenue (for example, interest income) 8000 - 8999: other expense (for example, income taxes) By separating each account by several numbers, many new accounts can be added between any two while maintaining the logical order.
Defining Accounts

Different types of businesses will have different accounts. For example, to report the cost of goods sold a manufacturing business will have accounts for its various manufacturing costs whereas a retailer will have accounts for the purchase of its stock merchandise. Many industry associations publish recommended charts of accounts for their respective industries in order to establish a consistent standard of comparison among firms in their industry. Accounting software packages often come with a selection of predefined account charts for various types of businesses. There is a trade-off between simplicity and the ability to make historical comparisons. Initially keeping the number of accounts to a minimum has the advantage of making the accounting system simple. Starting with a small number of accounts, as certain accounts acquired significant balances they would be split into smaller, more specific accounts. However, following this strategy makes it more difficult to generate consistent historical comparisons. For example, if the accounting system is set up with a miscellaneous expense account that later is broken into more detailed accounts, it then would be difficult to compare those detailed expenses with past expenses of the same type. In this respect, there is an advantage in organizing the chart of accounts with a higher initial level of detail.

Some accounts must be included due to tax reporting requirements. For example, in the U.S. the IRS requires that travel, entertainment, advertising, and several other expenses be tracked in individual accounts. One should check the appropriate tax regulations and generate a complete list of such required accounts. Other accounts should be set up according to vendor. If the business has more than one checking account, for example, the chart of accounts might include an account for each of them.
Account Order

Balance sheet accounts tend to follow a standard that lists the most liquid assets first. Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business. For example, sales would be listed before non-operating income. In some cases, part or all of the expense accounts simply are listed in alphabetical order.
Sample Chart of Accounts

The following is an example of some of the accounts that might be included in a chart of accounts.
Sample Chart of Accounts Asset Accounts

Current Assets

1000 1010 1020 1030 1040 1050 1060 1070 1100

Petty Cash Cash on Hand (e.g. in cash registers) Regular Checking Account Payroll Checking Account Savings Account Special Account Investments - Money Market Investments - Certificates of Deposit Accounts Receivable

1140 1150 1200 1205 1210 1215 1220 1230 1400 1410 1420 1430 1470

Other Receivables Allowance for Doubtful Accounts Raw Materials Inventory Supplies Inventory Work in Progress Inventory Finished Goods Inventory - Product #1 Finished Goods Inventory - Product #2 Finished Goods Inventory - Product #3 Prepaid Expenses Employee Advances Notes Receivable - Current Prepaid Interest Other Current Assets

Fixed Assets

1500 1510 1520 1530 1540 1550

Furniture and Fixtures Equipment Vehicles Other Depreciable Property Leasehold Improvements Buildings

1560 1690 1700 1710 1720 1730 1740 1750 1760

Building Improvements Land Accumulated Depreciation, Furniture and Fixtures Accumulated Depreciation, Equipment Accumulated Depreciation, Vehicles Accumulated Depreciation, Other Accumulated Depreciation, Leasehold Accumulated Depreciation, Buildings Accumulated Depreciation, Building Improvements

Other Assets

1900 1910 1915 1920 1990

Deposits Organization Costs Accumulated Amortization, Organization Costs Notes Receivable, Non-current Other Non-current Assets

Liability Accounts

Current Liabilities

2000 2300 2310 2320 2330 2335 2340 2350 2360 2370 2380 2390 2400 2410 2420 2440 2480

Accounts Payable Accrued Expenses Sales Tax Payable Wages Payable 401-K Deductions Payable Health Insurance Payable Federal Payroll Taxes Payable FUTA Tax Payable State Payroll Taxes Payable SUTA Payable Local Payroll Taxes Payable Income Taxes Payable Other Taxes Payable Employee Benefits Payable Current Portion of Long-term Debt Deposits from Customers Other Current Liabilities

Long-term Liabilities

2700 2702

Notes Payable Land Payable

2704 2706 2708 2710 2740

Equipment Payable Vehicles Payable Bank Loans Payable Deferred Revenue Other Long-term Liabilities

Equity Accounts 3010 3020 3030 Stated Capital Capital Surplus Retained Earnings

Revenue Accounts 4000 4020 4040 4060 4080 4540 4550 4800 4900 Product #1 Sales Product #2 Sales Product #3 Sales Interest Income Other Income Finance Charge Income Shipping Charges Reimbursed Sales Returns and Allowances Sales Discounts

Cost of Goods Sold

5000 5010 5020 5050 5100 5150 5200 5250 5300 5700 5730 5750 5800 5850 5900 5950

Product #1 Cost Product #2 Cost Product #3 Cost Raw Material Purchases Direct Labor Costs Indirect Labor Costs Heat and Power Commissions Miscellaneous Factory Costs Cost of Goods Sold, Salaries and Wages Cost of Goods Sold, Contract Labor Cost of Goods Sold, Freight Cost of Goods Sold, Other Inventory Adjustments Purchase Returns and Allowances Purchase Discounts

Expenses 6000 6010 6050 6100 Default Purchase Expense Advertising Expense Amortization Expense Auto Expenses

6150 6200 6250 6300 6350 6400 6450 6500 6510 6520 6530 6550 6600 6650 6660 6670 6700 6710 6750 6800 6850

Bad Debt Expense Bank Fees Cash Over and Short Charitable Contributions Expense Commissions and Fees Expense Depreciation Expense Dues and Subscriptions Expense Employee Benefit Expense, Health Insurance Employee Benefit Expense, Pension Plans Employee Benefit Expense, Profit Sharing Plan Employee Benefit Expense, Other Freight Expense Gifts Expense Income Tax Expense, Federal Income Tax Expense, State Income Tax Expense, Local Insurance Expense, Product Liability Insurance Expense, Vehicle Interest Expense Laundry and Dry Cleaning Expense Legal and Professional Expense

6900 6950 7000 7050 7100 7200 7250 7300 7350 7400 7450 7460 7550 7600 7620 7650 7700 7750 7800 8900 9000

Licenses Expense Loss on NSF Checks Maintenance Expense Meals and Entertainment Expense Office Expense Payroll Tax Expense Penalties and Fines Expense Other Taxes Postage Expense Rent or Lease Expense Repair and Maintenance Expense, Office Repair and Maintenance Expense, Vehicle Supplies Expense, Office Telephone Expense Training Expense Travel Expense Salaries Expense, Officers Wages Expense Utilities Expense Other Expense Gain/Loss on Sale of Assets

The four financial statements of critical value in this text are as follows: 1. Balance sheet 2. Income statement 3. Cost of goods manufactured statement 4. Statement of cash flow Management Accounting Financial statements are based on well defined accounting concepts and standards, some of which are fairly technical and require some concentrated study to learn and use. The following is a list of accounting terminology and concepts important in understanding financial statements for a manufacturing business.
Hopefully, you have learned these terms in a previous accounting course and only some review of these terms is needed. In addition to terminology, there are some accounting concepts and conventions of a broader nature that involve theory and even, in some cases, considerable differences of opinion. Some of the important concepts involved in this book are shown as follows. Accounting Concepts Absorption costing Earned/unearned revenue Accrual basis accounting Inventory costing methods Accounting control Matching Cash basis accounting Planning Cost Standards/principles of accounting Control Full costing reporting Deferred charges Contribution basis reporting Direct costing Accounting Financial Statement Relationships In addition to important financial statement terminology, there are a number of manufacturing financial statement relationships critical to understanding and using financial statements. These relationships may be summarized as simple mathematical equations. The most important of these relationships are the following:
Accounting Policies and Procedures Item
Material costing method Finished goods costing method Bad debt method Depreciation of equipment Income format Manufacturing overhead costing method Treatment of common expenses Income taxes Bond discount

Procedure
Average costing Average costing Percentages of sales method Straight-line Segmental income statement Direct costing (variable costing) Allocation by sales orders Net income is shown net of taxes Scientific amortization method

Cost of Goods Manufactured Statement

Material used = materials (beginning) + material purchases - materials inventory (ending) Cost of goods manufactured = materials used + factory labor + manufacturing overhead + work in process (beginning) - work in process (ending)
Income statement

Cost of goods sold = finished goods (beginning) + cost of goods manufactured- finished goods (ending) Finished goods (beginning) plus cost of goods manufactured is often called goods available for sale. Net income = sales - cost of goods sold - operating expenses The difference between sales and cost of goods sold is often reported as gross profit.
Balance Sheet

Assets = liabilities + stockholders equity Assets = current assets + fixed assets + other assets Liabilities = current liabilities + long-term liabilities Stockholders equity = common stock + premium/discount on common stock +retained earnings
Statement of Cash Flow

Change in cash = sources and uses from operations + sources and uses from financing activities + sources and uses from investing activities.

Bombay Dyeing & Manufacturing Company Ltd. - Research Center

Quarterly results in brief

Dec ' 11 Sep ' 11 Jun ' 11 Mar ' 11 Dec ' 10

Sales

443.77

511.96

414.26

638.46

447.26

Operating profit

-7.23

21.92

11.15

135.10

58.25

Interest

32.03

40.82

36.13

33.14

42.65

Gross profit

-36.92

-18.88

-24.64

15.38

15.98

EPS (Rs)

-12.85

-8.37

-9.81

20.21

0.17

Quarterly results in details

Dec ' 11 Sep ' 11 Jun ' 11 Mar ' 11 Dec ' 10

Other income

2.34

0.02

0.34

0.13

0.38

Stock adjustment

-28.21

54.29

-33.03

-13.34

-25.16

Raw material

312.60

314.53

320.27

358.71

266.35

Power and fuel

Dec ' 11

Sep ' 11

Jun ' 11

Mar ' 11

Dec ' 10

Employee expenses

17.67

17.20

14.60

15.48

16.19

Excise

Admin and selling expenses

Research and development expenses

Expenses capitalized

Other expenses

148.94

104.02

101.27

142.51

131.63

Provisions made

Depreciation

15.19

15.05

15.15

15.38

15.31

Taxation

5.26

Net profit / loss

-52.11

-33.93

-39.79

81.95

0.67

Extra ordinary item

Prior year adjustments

0.50

Equity capital

40.55

40.55

40.55

40.55

38.61

Equity dividend rate

Agg.of non-prom. shares (Lacs)

185.81

186.57

198.46

198.46

198.44

Agg.of non promotoholding (%)

45.83

46.01

48.95

48.95

51.39

OPM (%)

-1.63

4.28

2.69

21.16

13.02

GPM (%)

-8.28

-3.69

-5.94

2.41

3.57

NPM (%)

-11.68

-6.63

-9.60

12.83

0.15

(Rs crore)

Half yearly results in brief

Sep ' 11 Mar ' 11 Sep ' 10 Mar ' 10 Sep ' 09

Sales

926.22

1,085.74

864.29

947.88

724.42

Operating profit

33.07

193.35

47.15

172.60

89.47

Interest

76.95

75.79

79.54

89.46

89.98

Gross profit

-43.52

118.07

-29.61

83.64

-0.51

EPS (Rs)

-18.18

20.37

-15.86

12.73

-7.96

Half yearly results in details

Sep ' 11 Mar ' 11 Sep ' 10 Mar ' 10 Sep ' 09

Other income

0.36

0.51

2.78

0.50

Stock adjustment

21.26

-38.50

-8.99

7.20

-4.68

Raw material

634.80

625.06

498.04

431.16

343.69

Power and fuel

Employee expenses

31.80

31.67

28.36

25.37

24.35

Excise

Admin and selling expenses

Sep ' 11

Mar ' 11

Sep ' 10

Mar ' 10

Sep ' 09

Research and development expenses

Expenses capitalized

Other expenses

205.29

274.16

299.73

311.55

271.59

Provisions made

Depreciation

30.20

30.69

31.40

30.00

29.54

Taxation

5.26

0.22

3.77

Net profit / loss

-73.72

82.62

-61.23

49.16

-30.74

Extra ordinary item

-0.71

-0.69

Prior year adjustments

0.50

Equity capital

40.55

40.55

38.61

38.61

38.61

Equity dividend rate

Agg.of non-prom. shares (Lacs)

186.57

198.46

198.44

198.31

198.48

Agg.of non promotoholding (%)

46.01

48.95

51.39

51.35

51.40

OPM (%)

3.57

17.81

5.46

18.21

12.35

GPM (%)

-4.70

10.87

-3.41

8.82

NPM (%)

-7.96

7.61

-7.06

5.18

Annual results in brief

Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07

Sales

1,950.01

1,674.08

1,407.23

959.01

502.54

Operating profit

243.59

262.07

24.43

58.32

66.50

Interest

158.41

179.44

160.54

62.06

24.59

Gross profit

88.47

83.13

-135.81

44.37

69.72

EPS (Rs)

5.27

4.77

-50.41

4.32

9.31

Annual results in details

Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07

Other income

3.29

0.50

0.30

48.11

27.81

Stock adjustment

-47.49

2.52

-4.22

-1.78

12.56

Raw material

1,123.10

776.63

777.14

601.78

302.48

Power and fuel

Employee expenses

60.03

49.72

51.38

35.12

38.48

Excise

43.64

25.33

3.95

Admin and selling expenses

Research and development expenses

Expenses capitalized

Mar ' 11

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

Other expenses

570.78

583.14

514.86

240.24

78.57

Provisions made

Depreciation

62.08

59.54

55.73

35.43

17.46

Taxation

5.26

3.77

1.02

1.33

4.48

Net profit / loss

21.39

18.42

-194.62

16.68

35.93

Extra ordinary item

-1.40

-2.06

9.07

-11.85

Prior year adjustments

0.26

Equity capital

40.55

38.61

38.61

38.61

38.61

Equity dividend rate

Agg.of non-prom. shares (Lacs)

198.46

198.31

198.47

198.45

214.16

Agg.of non promotoHolding (%)

48.95

51.35

51.40

51.39

55.46

OPM (%)

12.49

15.65

1.74

6.08

13.23

GPM (%)

4.53

4.96

-9.65

4.41

13.15

NPM (%)

1.10

1.10

-13.83

1.66

6.77

(Rs crore)

Balance sheet
Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07

Mar ' 11

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

Sources of funds
Owner's fund

Equity share capital

40.54

38.61

38.61

38.61

38.61

Share application money

26.75

11.89

Preference share capital

Reserves & surplus

282.07

171.74

130.25

357.30

356.41

Loan funds
Secured loans 1,146.49 1,611.97 1,499.00 1,024.67 798.49

Unsecured loans

90.81

163.14

211.88

391.09

253.91

Total

1,586.66

1,985.46

1,879.74

1,823.56

1,447.42

Uses of funds
Fixed assets

Gross block

1,190.14

1,183.44

1,159.75

1,060.35

654.58

Less : revaluation reserve

778.83

201.56

7.66

Less : accumulated depreciation

292.81

231.26

178.72

123.67

512.86

Net block

118.50

952.18

779.47

936.68

134.06

Capital work-in-progress

205.55

208.39

218.85

303.90

735.53

Investments

60.19

60.19

60.22

126.72

153.70

Mar ' 11

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

Net current assets

Current assets, loans & advances 1,542.39 1,091.56 1,167.20 771.19 679.93

Less : current liabilities & provisions

339.97

326.86

347.40

317.72

322.92

Total net current assets

1,202.42

764.70

819.80

453.47

357.01

Miscellaneous expenses not written

1.40

2.79

67.12

Total

1,586.66

1,985.46

1,879.74

1,823.56

1,447.42

Notes:
Book value of unquoted investments 60.19 60.19 60.22 126.72 153.70

Market value of quoted investments

Contingent liabilities

111.70

75.26

49.64

123.83

201.30

Number of equity sharesoutstanding (Lacs)

405.47

386.17

386.17

386.15

386.10

(Rs crore)

Profit loss account

Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07

Income
Operating income 1,916.55 1,661.38 1,344.00 934.54 496.22

Expenses
Material consumed 1,122.00 824.85 811.19 630.80 294.58

Manufacturing expenses

318.40

358.07

272.29

267.45

130.67

Personnel expenses

60.02

49.72

51.38

35.13

38.47

Mar ' 11

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

Selling expenses

118.13

74.56

87.37

23.40

22.04

Adminstrative expenses

71.60

73.95

59.85

60.49

41.73

Expenses capitalized

-148.60

-100.86

Cost of sales

1,690.15

1,381.15

1,282.08

868.67

426.63

Operating profit

226.40

280.23

61.92

65.87

69.59

Other recurring income

40.18

23.75

25.84

26.59

19.41

Adjusted PBDIT

266.58

303.98

87.76

92.46

89.00

Financial expenses

174.07

200.70

184.95

73.40

31.83

Depreciation

62.08

59.54

55.73

35.42

17.46

Other write offs

Adjusted PBT

30.43

43.74

-152.92

-16.36

39.71

Tax charges

5.26

3.77

1.02

1.33

4.48

Adjusted PAT

25.17

39.97

-153.94

-17.69

35.23

Non recurring items

-4.06

-21.55

-40.68

25.30

0.70

Other non cash adjustments

0.28

Reported net profit

21.39

18.42

-194.62

7.61

35.93

Earnigs before appropriation

43.05

34.76

-6.03

202.01

35.93

Equity dividend

14.19

9.66

3.86

13.52

19.31

Preference dividend

Mar ' 11

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

Dividend tax

2.30

1.60

0.66

2.30

3.28

Retained earnings

26.56

23.50

-10.55

186.19

13.34

Accounting Terminology Amortization Accounts receivable Accounts payable Bonds Bad debts Credit Capital Cash Common stock Contribution margin Cost Current assets Cost of goods sold Cost of goods manufactured Depreciation Direct cost Dividends Finished goods Fixed assets Factory labor Fixed cost Gain/loss on sale Gross profit Indirect cost Inventory Income taxes Investment Manufacturing overhead

Material used Net income Net operating income Net income after taxes Perpetual inventory Periodic inventory Retained earnings Premium/discount on stock Premium/discount on bonds Stockholders equity Tax expense Treasury stock Trade-in value Variable cost