The chart of accounts is represented by a listing of all accounts used in the general ledger of a company (or an organization) and is like the framework for the organization. All accounts within the chart of accounts would fall under five main classes: Assets, liabilities, equity, expenses, and revenue.
The chart is usually sorted in order by account number. This makes it easier because you will not need to locate accounts in specific names. Therefore the accounts are named in numeric, or sometimes in alphabetic or alphanumeric.
Through an accounting software (such as the Xero accounting software), you can used the chart of accounts to aggregate information into the financial statements of a company. You can actually import the chart of accounts into Xero through a CSV spreadsheet template. Under the five main classes, Xero would further break them down into 17 account types.
Account class: Assets
Bank, current asset, fixed asset, inventory, non-current asset, and pre-payment.
Account class: Liabilities
Current liability, liability, and non-current liability
Account class: Expenses
Depreciation, direct costs, expense, and overhead.
Account class: Equity
Account class: Revenue
Other income, revenue, and sales.
For the chart of accounts concept of a company, the best practices include the following.
The chart of accounts is not something that should be changed frequently and its version should always be kept up-to-date by one central point. Never ever forbid subsidiaries (of the head office company) to change the standard chart of accounts without a few very strong reasons. Having many versions in current use will make things very difficult to track down and results of the business will become very hard to consolidate.
When you first create the chart of accounts, you must prepare it is something that will not be changed for many years. It is for consistency reason. You will always have to compare the results in the same account over a period of multiple years. When you start with a small number of accounts and then gradually expand the number of accounts over time, it will become increasingly difficult to obtain comparable financial information for more than the past year.
Over time you must set up a periodical review process. It is up to you initiate and keep up with the periodical review. The account list should be review to see if any accounts contain relatively immaterial amounts. When the information is not required anymore for reporting, you should shut down these accounts and roll the stored information into a larger account. When you do this periodically, it keeps the number of accounts down to a very manageable level.
In the chart of accounts, accounts are usually listed in order of their appearance in the financial statements. It starts with the balance sheet and continues with the income statement. In short, many modern day companies would structure their chart of accounts so expense information is separately compiled by department. For example, the sales department, the marketing department, the engineering department, and the accounting department would all have the same set of expense accounts.