Friday, May 7, 2010

Types of General Ledger Accounts

Following is a repost (edited) from a prior year post - it is a popular request of small businesses

Sometimes I find that people need the basics. Often in small businesses, employees earn their roles in the company by default. Maybe an experienced bookkeeper left the company so the accounting clerk gets promoted to bookkeeper. Sometimes a couple takes on the role of running a company and choose to take on the accounting, management, marketing and running of the business. This is a big role, too much sometimes for just a couple and can be draining on a relationship as well.

When I work with companies, I usually find an employee who is hungry for all the knowledge I can share and they appreciate the basics. One of the accounting basics I share that seems to be appreciated is a very basic description of the types of accounts in the general ledger. If you number your accounts, or use the standard numbering for your chart of accounts, this theorey will be correct. If your numbering system is a bit different, the numbers may vary but the structure is the same. See what you think:

Basic description of the general ledger acccount types:

  • Accounts beginning with a 1 are Assets. Their normal balance is "debit".  These accounts consist of what you own or what people owe you.
  • Accounts beginning with a 2 are Liabilities. Their normal balance is "credit". Liabilities are what you owe to others.
  • Accounts beginning with a 3 are Equity. Their normal balance is "credit" Equity is the worth of your business, it includes money the owner have put into the company and retained earnings (profit and losses from prior years).
 Assets, Liabilities and Equity appear on your Balance Sheet Financial Report

  •  Accounts beginning with a 4 are Income Accounts. (Sometimes the account number's differ depensing on your CPA, but this number structure is very typical).  Income accounts normal balance is "credit". These accounts record the Income also referred to as Revenue or Sales for your company.
  •  Accounts beginning with a 5 are Cost of Goods Sold Expense Accounts. Their normal balance is "debit". This is the cost for what you buy to make the money listed as Income ie:  the product you purchase (if you have inventory,  this is the cost of the item pulled from inventory).  It could include labor if you pay labor to build a part or to perform a construction job.
  •  Accounts beginning with a 6 are Overhead expense accounts. Their normal balance is "debit". This could include shop and warehouse expenses or equipment expenses.
  • Accounts beginning with a 7 are General Administrative expense accounts. Their normal balance is "debit". This is the cost of keeping your office open, rent, office supplies, utilities, office and officer salaries and wages, etc. for the current year.
  •  800 and 900 accounts may include other accounts not listed above, such as Other Income (normal balance of "credit"), Interest Expense (normal balance of "debit"), Federal and State Taxes (normal balance of "debit").
Income and Expenses Accounts make up your Profit and Loss Financial Statement also known as Income Statement

This numbering structure may vary depending on how your books are set up.  If you are using QuickBooks,  account numbers can be "turned on" in your General Preferences.  Consult with your CPA or financial consultant (or us) before turning them on.


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