Chapter 4- Lesson 1 Understanding the Chart of Accounts

The Chart of Accounts is usually divided into five main types of accounts: assets, liabilities, equity, income (revenue), and expenses. Assets represent the things a business owns, such as cash, accounts receivable, or inventory. Liabilities are what the business owes to others, like loans payable or outstanding amounts to creditors. Equity reflects the owner’s stake in the business and includes accounts like owner’s capital and retained earnings. Income, or revenue, includes all the money the business earns from activities such as sales or providing services. Expenses refer to the costs a business incurs to operate, such as rent, utilities, and office supplies. Each of these categories can contain multiple sub-accounts, depending on the size and complexity of the business, allowing for more detailed tracking and reporting.

A small business might set up its Chart of Accounts with simple, numbered categories like this: 100 – Cash, 110 – Accounts Receivable, 200 – Accounts Payable, 300 – Owner’s Equity, 400 – Sales Income, 500 – Rent Expense, and 510 – Utilities Expense. These numbers help organize the accounts by type and make them easier to find and manage. For example, when the business pays rent, it records the transaction under "500 – Rent Expense". When it makes a sale, the income is recorded under "400 – Sales Income". This structured system keeps financial records clear, consistent, and easy to navigate.