The field of accounting—both the older manual systems and today's
basic accounting software—is based on the 500-year-old accounting
procedure known as double entry. Double entry is a simple yet
powerful concept: each and every one of a company's transactions will
result in an amount recorded into at least two of the accounts in the accounting system.
The Chart of Accounts
To begin the process of setting up Joe's accounting system, he will
need to make a detailed listing of all the names of the accounts that
Direct Delivery, Inc. might find useful for reporting transactions.
This detailed listing is referred to as a chart of accounts. (Accounting software often provides sample charts of accounts for various types of businesses.)
As he enters his transactions, Joe will find that the chart of
accounts will help him select the two (or more) accounts that are
involved. Once Joe's business begins, he may find that he needs to add
more account names to the chart of accounts, or delete account names
that are never used. Joe can tailor his chart of accounts so that it
best sorts and reports the transactions of his business.
Because of the double entry system all of Direct Delivery's
transactions will involve a combination of two or more accounts from the
balance sheet and/or the income statement. Marilyn lists out some
sample accounts that Joe will probably need to include on his chart of
accounts:
Balance Sheet accounts:
Balance Sheet accounts:
- Asset accounts (Examples: Cash, Accounts Receivable, Supplies, Equipment)
- Liability accounts (Examples: Notes Payable, Accounts Payable, Wages Payable)
- Stockholders' Equity accounts (Examples: Common Stock, Retained Earnings)
- Revenue accounts (Examples: Service Revenues, Investment Revenues)
- Expense accounts (Examples: Wages Expense, Rent Expense, Depreciation Expense)