How is the chart of accounts built: what do the four-digit code and the six account types mean?

Mehriniso opened a small print shop: it prints business cards, banners and book covers. In the very first week the accountant stopped her with a question: «Which page do we record the cash in the till on, what about the paper stock, and what if a client brings their own paper?» In the second lesson we defined an account as «a page on which things of one kind are recorded». Today we look at the order in which all these pages are bound together, that is, how the chart of accounts is built.

What is the chart of accounts and who draws it up?

The chart of accounts is the official list of all existing accounts: the number, name and type of each. For business entities it is given in Appendix 1 to NAS No. 21. The standard states the content of the chart briefly: the chart consists of accounts grouped by the five elements of reporting (asset, liability, equity, income, expense) and of off-balance-sheet accounts (paragraph 5).

Mehriniso does not use the whole list. For example, she has no need for an account for perennial plantings or animals. That is why the standard asks one thing of every organisation: on the basis of the chart in Appendix 1, draw up its own working chart of accounts and reflect it in its accounting policy (an internal document that records by which rules the organisation keeps its books) (paragraph 4). So the official chart is like a catalogue, and the working chart is the set of pages the print shop has chosen from it.

How many chapters does the chart have?

The official chart has five chapters. I compiled the table below by counting the rows of Appendix 1: a «row with a type shown» is usually a group of accounts (for example, 0100, 5100; one exception: the sub-account 2980 «Trade markup» has the type KA shown on its own), and an «account with a name shown» is counted together with sub-accounts.

An interesting point: in chapter 3 the numbers 8000, 8100 and 8200 are in the list but have no name shown, so I did not add them to the «accounts with a name shown» column. Numbers without a name also appear in the assets chapter (for example, 1200, 3300, 5300) and in the section of non-current liabilities (7400–7700). Do not invent a name of your own for such a number: leave it as it is written in the chart.

What does the four-digit code mean?

One regularity can be seen from the table; the code can be understood as an «address». This is not a rule but my own observation, though it holds for every number in the chart:

• First digit: the major section. The digits 0 and 1 to 5 belong to the assets chapter (0 for non-current assets, 1–5 for current assets). 6 is current liabilities, 7 is non-current liabilities, 8 is equity, 9 is income and expenses.
• First two digits: the group. For example, accounts with the digits 51 belong to the group «cash in the settlement account» (5100).
• Four digits: the specific account. 5110 is the «Settlement account» of this group, and 0150 is «Computer equipment and computing hardware».

The type of an account is usually shown in the group row of the table (for example, 0100 | Fixed assets | A), and the sub-accounts sit inside that group. So if you look for 0150, you learn its type from the 0100 row. There is an exception: 2980 «Trade markup» is marked KA in its own row.

Off-balance-sheet accounts are different: their numbers have three digits (001 to 016).

Six types: A, P, KA, KP, T and BT

Paragraph 3 of NAS No. 21 defines the types precisely. Below, each one is shown on the print-shop example, and the standard definition is given briefly in my own words.

1. Active (A). An account that reflects assets. Money in the print shop's bank account (5110), the stock of paper and ink (1010) and the computer (0150) are of this type.
2. Passive (P). Reflects liabilities and equity. The debt to the paper supplier (6010) and Mehriniso's charter capital (8330) are of this type.
3. Contra-asset (KA). The standard calls it an account «reflecting the net value of an asset»: it is deducted from the balance of the related active account. Example: the computer stands on 0150 at 9 million soum, and its depreciation on 0250 is 1.5 million soum. In the statements the net value of the computer will be 9 − 1.5 = 7.5 million soum.
4. Contra-liability (KP). The counterpart of KA on the liabilities-and-equity side: it is deducted from the balance of the related passive account. In the chart, 8600 «Treasury shares (repurchased own shares)» is assigned to this type. If a joint-stock company buys back its own shares, this amount is deducted from equity (this applies more to joint-stock companies; Mehriniso's LLC will not meet it).
5. Transit (T). By definition these are «temporary accounts of income and expenses that have no balance (remainder) at the end of the reporting period». All the groups 9000–9900 are of this type. The print shop's revenue is gathered on 9030 «Revenue from performance of work and rendering of services», and at the end of the period it is closed.
6. Off-balance-sheet (BT). For information about assets that do not belong to the organisation but are temporarily in its hands, and also about contingent rights and obligations. Example: a client brought their own paper for printing. The paper does not belong to the print shop, so it does not go into the on-balance account 1010 but is kept on account 003 «Materials accepted for processing» of the chart.

The first four, that is, A, P, KA and KP, are called permanent accounts in the standard: they are visible in the balance sheet and have a balance at the end of the reporting period.

One example: the print shop's opening position

Now we put everything together. The position of Mehriniso's print shop («Qalamchi Print» LLC, that is, a limited liability company) on the day it starts work (in soum, hypothetical):

Both totals are equal because the amount of the contra-asset account was deducted from the asset. Outside the table, on the off-balance-sheet account 003, sits the client's paper worth 2 000 000 soum: it is not added to either total.

How are these accounts linked with each other?

Accounts do not stand alone: every event links two accounts. We call such a link a journal entry, and we will study it separately in lesson 6. For now this is enough: in every entry one account is taken on the «debit» side (left) and the other on the «credit» side (right). The four events of the print shop's first days are recorded by the ready-made rows of NAS No. 21 as follows (the amounts of 8330, 6010, 1010 and 5010 in the opening table match these entries; the computer and the remaining money in the bank come from other events, which we will see in the next lessons):

The rows themselves show which chapters are joined. In the first entry 4610 from the assets chapter (the founder's debt for the contribution to the charter capital) is linked with 8330 from the equity chapter. In the second and third entries the assets chapter is joined with the liabilities chapter. After the third entry the debt on 6010 is 12 − 5 = 7 million soum, which matches the amount in the table.

Practical tips

• Before opening a new account, first find its number and name in the chart. Do not change the name on your own: the names come from the official document.
• Do not forget to include the working chart in the accounting policy: the standard requires it (paragraph 4).
• When choosing an account, start from the chapters: «Is this thing ours (asset), a debt (liability), the owner's share (equity), or is it only temporarily with us (off-balance-sheet)?» This question makes finding the account much easier.
• Do not mix up the contra-asset account with the fixed asset itself: depreciation stands on 0250, not on 0150. Otherwise the net value comes out wrong.
• Do not put someone else's property on the balance sheet. Material received from a client for processing (003), stock accepted for custody (002) and the like are kept on off-balance-sheet accounts.

Three places where beginners often go wrong

• «Contra» does not mean bad. KA and KP are simply deducting accounts: they refine the amount of the main account.
• A transit account is not permanent. The accounts of chapter 9000 must have no balance at the end of the period and are not visible in the balance sheet.
• An off-balance-sheet account does not affect the balance sheet. Do not add its amount to the total of assets.

In the next lesson

In the fourth lesson we return to the balance sheet equation and look at the four types of business transactions: how each event affects the balance sheet, sometimes both sides changing at once and sometimes only a shift within one side.