First on the chart are always the accounts that track what the company owns – its assets: current assets and long-term assets.
Current assets
Current assets are the key assets that your business uses up during a 12-month period and will likely not be there the next year. The accounts that reflect current assets on the Chart of Accounts are as follows:
✔ Cash in Checking: Any company’s primary account is the checking account used for operating activities. This is the account used to deposit revenues and pay expenses. Some companies have more than one operating account in this category; for example, a company with many divisions may have an operating account for each division.
✔ Cash in Savings: This account is used for surplus cash. Any cash for which there is no immediate plan is deposited in an interest-earning savings account so that it can at least earn interest while the company decides what to do with it.
✔ Cash on Hand: This account is used to track any cash kept at retail stores or in the office. In retail stores, cash must be kept in registers in order to provide change to customers. In the office, petty cash is often kept around for immediate cash needs that pop up from time to time. This account helps you keep track of the cash held outside a financial institution.
✔ Accounts Receivable: If you offer your products or services to customers on store credit (meaning your store credit system), then you need this account to track the customers who buy on your dime.
✔ Inventory: This account tracks the products on hand to sell to your customers. The value of the assets in this account varies depending on how you decide to track the flow of inventory in and out of the business. Book III Chapter 1 discusses inventory valuation and tracking in greater detail.
✔ Prepaid Insurance: This account tracks insurance you pay in advance that’s credited as it’s used up each month. For example, if you own a building and prepay one year in advance, each month you reduce the amount that you prepaid by 1/12 as the prepayment is used up.
Depending upon the type of business you’re setting up, you may have other current asset accounts that you decide to track. For example, if you’re starting a service business in consulting, you’re likely to have a Consulting account for tracking cash collected for those services. If you run a business in which you barter assets (such as trading your services for paper goods), you may add a Barter account for business-to-business barter.
Long-term assets
Long-term assets are assets that you anticipate your business will use for more than 12 months. This section lists some of the most common long-term assets, starting with the key accounts related to buildings and factories owned by the company:
✔ Land: This account tracks the land owned by the company. The value of the land is based on the cost of purchasing it. Land value is tracked separately from the value of any buildings standing on that land because land isn’t depreciated in value, but buildings must be depreciated. Depreciation is an accounting method that shows an asset is being used up. Book IV Chapter 1 talks more about depreciation.
✔ Buildings: This account tracks the value of any buildings a business owns. As with land, the value of the building is based on the cost of purchasing it. The key difference between buildings and land is that the building’s value is depreciated, as discussed in the previous bullet.
✔ Accumulated Depreciation – Buildings: This account tracks the cumulative amount a building is depreciated over its useful lifespan. Book IV Chapter 1 talks more about how to calculate depreciation.
✔ Leasehold Improvements: This account tracks the value of improvements to buildings or other facilities that a business leases rather than purchases. Frequently when a business leases a property, it must pay for any improvements necessary in order to use that property the way it’s needed. For example, if a business leases a store in a strip mall, it’s likely that the space leased is an empty shell or filled with shelving and other items that may not match the particular needs of the business. As with buildings, leasehold improvements are depreciated as the value of the asset ages.
✔ Accumulated Depreciation – Leasehold Improvements: This account tracks the cumulative amount depreciated for leasehold improvements.
The following are the types of accounts for smaller long-term assets, such as vehicles and furniture:
✔ Vehicles: This account tracks any cars, trucks, or other vehicles owned by the business. The initial value of any vehicle is listed in this account based on the total cost paid to put the vehicle in service. Sometimes this value is more than the purchase price if additions were needed to make the vehicle usable for the particular type of business. For example, if a business provides transportation for the handicapped and must add additional equipment to a vehicle in order to serve the needs of its customers, that additional equipment is added to the value of the vehicle. Vehicles also depreciate through their useful lifespan.
✔ Accumulated Depreciation – Vehicles: This account tracks the depreciation of all vehicles owned by the company.
✔ Furniture and Fixtures: This account tracks any furniture or fixtures purchased for use in the business. The account includes the value of all chairs, desks, store fixtures, and shelving needed to operate the business. The value of the furniture and fixtures in this account is based on the cost of purchasing these items. These items are depreciated during their useful lifespan.
✔ Accumulated Depreciation – Furniture and Fixtures: This account tracks the accumulated depreciation of all furniture and fixtures.
✔ Equipment: This account tracks equipment that was purchased for use for more than one year, such as computers, copiers, tools, and cash registers. The value of the equipment is based on the cost to purchase these items. Equipment is also depreciated to show that over time it gets used up and must be replaced.
✔ Accumulated Depreciation – Equipment: This account tracks the accumulated depreciation of all the equipment.
The following accounts track the long-term assets that you can’t touch but that still represent things of value owned by the company, such as organization costs, patents, and copyrights. These are called intangible assets, and the accounts that track them include
✔ Organization Costs: This account tracks initial start-up expenses to get the business off the ground. Many such expenses can’t be written off in the first year. For example, special licenses and legal fees must be written off over a number of years using a method similar to depreciation, called amortization, which is also tracked. Book IV Chapter 1 discusses amortization in greater detail.
✔ Amortization – Organization Costs: This account tracks the accumulated amortization of organization costs during the period in which they’re being written-off.
✔ Patents: This account tracks the costs associated with patents, grants made by governments that guarantee to the inventor of a product or service the exclusive right to make, use, and sell that product or service over a set period of time. Like organization costs, patent costs are amortized. The value of this asset is based on the expenses the company incurs to get the right to patent the product.
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