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9.0 Introduction to Accounting


Tradepoint includes a fully integrated Accounting program performing daily accounting tasks for you as your business carries out processes such as Quotes, Orders, Invoices, Bills, and Purchase Orders for example.

As far as establishing your General Ledger we consulting with your company Accountant is the best way to establish the most accurate and relevant General Ledger structure to meet your companies needs.

Information about General Ledgers and example General Ledger structures can easily be found through online resources for explanations and examples of General Ledgers for different types of Canadian and American company structures.

Below is some basic background information and two different examples of General Ledger structures.

The general ledger, sometimes known as the nominal ledger as named originally by Phil Smith, is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses.

The general ledger is a summary of all of the transactions that occur in the company. It is built up by posting transactions recorded in the general journal.

There are seven basic categories in which all accounts are grouped:

1.    Asset

2.    Liability

3.    Owner's equity

4.    Revenue

5.    Expense

6.    Gains

7.    Losses

The balance sheet and the income statement are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits, (right side), and amounts as debits, (left side), in the pages of the general ledger. The listing of the account names and the sum of the account balances is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement preparation process, to ensure the equality of the total debits and credits.

The general ledger should include the date, description and balance or total amount for each account. It is usually divided into at least seven main categories. These categories generally include assets, liabilities, owner's equity, revenue, expenses, gains and losses. The main categories of the general ledger may be further subdivided into sub-ledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc.

Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system will ensure that the general ledger will always be in balance; thus maintaining the accounting equation:

A chart of accounts is a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger. A company has the flexibility to tailor its chart of accounts to best suit its needs, including adding accounts as needed.

Within the chart of accounts you will find that the accounts are typically listed in the following order:

Balance sheet accounts

  • Assets
  • Liabilities
  • Owner's (Stockholders') Equity

Income statement accounts

  • Operating Revenues
  • Operating Expenses
  • Non-operating Revenues and Gains
  • Non-operating Expenses and Losses

Within the categories of operating revenues and operating expenses, accounts might be further organized by business function (such as producing, selling, administrative, financing) and/or by company divisions, product lines, etc.

A company's organization chart can serve as the outline for its accounting chart of accounts. For example, if a company divides its business into ten departments (production, marketing, human resources, etc.), each department will likely be accountable for its own expenses (salaries, supplies, phone, etc.). Each department will have its own phone expense account, its own salaries expense, etc.

A chart of accounts will likely be as large and as complex as the company itself. An international corporation with several divisions may need thousands of accounts, whereas a small local retailer may need as few as one hundred accounts.

Each account in the chart of accounts is typically assigned a name and a unique number by which it can be identified. (Software for some small businesses may not require account numbers.) Account numbers are often five or more digits in length with each digit representing a division of the company, the department, the type of account, etc.

As you will see, the first digit might signify if the account is an asset, liability, etc. For example, if the first digit is a "1" it is an asset. If the first digit is a "5" it is an operating expense.

A gap between account numbers allows for adding accounts in the future. The following is a partial listing of a sample chart of accounts.

Current Assets (account numbers 10000 - 16999)

10100   Cash - Regular Checking
10200   Cash - Payroll Checking
10600   Petty Cash Fund
12100   Accounts Receivable
12500   Allowance for Doubtful Accounts
13100   Inventory
14100   Supplies
15300   Prepaid Insurance

Property, Plant, and Equipment (account numbers 17000 - 18999)

17000   Land
17100   Buildings
17300   Equipment
17800   Vehicles
18100   Accumulated Depreciation - Buildings
18300   Accumulated Depreciation - Equipment
18800   Accumulated Depreciation - Vehicles

Current Liabilities (account numbers 20000 - 24999)

20100   Notes Payable - Credit Line #1
20200   Notes Payable - Credit Line #2
21000   Accounts Payable
22100   Wages Payable
23100   Interest Payable
24500   Unearned Revenues

Long-term Liabilities (account numbers 25000 - 26999)

25100   Mortgage Loan Payable
25600   Bonds Payable
25650   Discount on Bonds Payable

Stockholders' Equity (account numbers 27000 - 29999)

27100 Common Stock, No Par
27500 Retained Earnings
29500 Treasury Stock

Operating Revenues (account numbers 30000 - 39999)

31010   Sales - Division #1, Product Line 010
31022   Sales - Division #1, Product Line 022
32015   Sales - Division #2, Product Line 015
33110   Sales - Division #3, Product Line 110

Cost of Goods Sold (account numbers 40000 - 49999)

41010   COGS - Division #1, Product Line 010
41022   COGS - Division #1, Product Line 022
42015   COGS - Division #2, Product Line 015
43110   COGS - Division #3, Product Line 110

Marketing Expenses (account numbers 50000 - 50999)

50100   Marketing Dept. Salaries
50150   Marketing Dept. Payroll Taxes
50200   Marketing Dept. Supplies
50600   Marketing Dept. Telephone

Payroll Dept. Expenses (account numbers 59000 - 59999)

59100   Payroll Dept. Salaries
59150   Payroll Dept. Payroll Taxes
59200   Payroll Dept. Supplies
59600   Payroll Dept. Telephone

Other (account numbers 90000 - 99999)

91800   Gain on Sale of Assets
96100   Loss on Sale of Assets

In this second example is a partial listing of another sample chart of accounts. Note that each account is assigned a three-digit number followed by the account name. The first digit of the number signifies if it is an asset, liability, etc. For example, if the first digit is a "1" it is an asset, if the first digit is a "3" it is a revenue account, etc.

The company decided to include a column to indicate whether a debit or credit will increase the amount in the account. This sample chart of accounts also includes a column containing a description of each account in order to assist in the selection of the most appropriate account.


Account Title


Description/Explanation of Account




Checking account balance (as shown in company records), currency, coins, checks received from customers but not yet deposited.


Accounts Receivable


Amounts owed to the company for services performed or products sold but not yet paid for.


Merchandise Inventory


Cost of merchandise purchased but has not yet been sold.




Cost of supplies that have not yet been used. Supplies that have been used are recorded in Supplies Expense.


Prepaid Insurance


Cost of insurance that is paid in advance and includes a future accounting period.




Cost to acquire and prepare land for use by the company.




Cost to purchase or construct buildings for use by the company.


Depreciation - Buildings


Amount of the buildings' cost that has been allocated to Depreciation Expense since the time the building was acquired.




Cost to acquire and prepare equipment for use by the company.


Depreciation - Equipment


Amount of equipment's cost that has been allocated to Depreciation Expense since the time the equipment was acquired.

Liability Accounts


Account Title


Description/Explanation of Account


Notes Payable


The amount of principal due on a formal written promise to pay. Loans from banks are included in this account.


Accounts Payable


Amount owed to suppliers who provided goods and services to the company but did not require immediate payment in cash.


Wages Payable


Amount owed to employees for hours worked but not yet paid.


Interest Payable


Amount owed for interest on Notes Payable up until the date of the balance sheet. This is computed by multiplying the amount of the note times the effective interest rate times the time period.


Unearned Revenues


Amounts received in advance of delivering goods or providing services. When the goods are delivered or services are provided, this liability amount decreases.


Mortgage Loan Payable


A formal loan that involves a lien on real estate until the loan is repaid.

Owner's Equity Accounts


Account Title


Description/Explanation of Account


Mary Smith, Capital


Amount the owner invested in the company (through cash or other assets) plus earnings of the company not withdrawn by the owner.


Mary Smith, Drawing


Amount that the owner of the sole proprietorship has withdrawn for personal use during the current accounting year. At the end of the year, the amount in this account will be transferred into Mary Smith, Capital (account 290).

Operating Revenue Accounts


Account Title


Description/Explanation of Account


Service Revenues


Amounts earned from providing services to clients, either for cash or on credit. When a service is provided on credit, both this account and Accounts Receivable will increase. When a service is provided for immediate cash, both this account and Cash will increase.

Operating Expense Accounts


Account Title


Description/Explanation of Account


Salaries Expense


Expenses incurred for the work performed by salaried employees during the accounting period. These employees normally receive a fixed amount on a weekly, monthly, or annual basis.


Wages Expense


Expenses incurred for the work performed by non-salaried employees during the accounting period. These employees receive an hourly rate of pay.


Supplies Expense


Cost of supplies used up during the accounting period.


Rent Expense


Cost of occupying rented facilities during the accounting period.


Utitilities Expense


Costs for electricity, heat, water, and sewer that were used during the accounting period.


Telephone Expense


Cost of telephone used during the current accounting period.


Advertising Expense


Costs incurred by the company during the accounting period for ads, promotions, and other selling and expenses (other than salaries).


Depreciation Expense


Cost of long-term assets allocated to expense during the current accounting period.

Non-Operating Revenues and Expenses, Gains, and Losses


Account Title


Description/Explanation of Account


Interest Revenues


Interest and dividends earned on bank accounts, investments or notes receivable. This account is increased when the interest is earned and either Cash or Interest Receivable is also increased.


Gain on Sale of Assets


Occurs when the company sells one of its assets (other than inventory) for more than the asset's book value.


Loss on Sale of Assets


Occurs when the company sells one of its assets (other than inventory) for less than the asset's book value.

Accounting software frequently includes sample charts of accounts for various types of businesses. It is expected that a company will expand and/or modify these sample charts of accounts so that the specific needs of the company are met. Once a business is up and running and transactions are routinely being recorded, the company may add more accounts or delete accounts that are never used.

The chart of accounts lists the accounts that are available for recording transactions. In keeping with the double-entry system of accounting, a minimum of two accounts is needed for every transaction--at least one account is debited and at least one account is credited.

When a transaction is entered into a company's accounting software, it is common for the software to prompt for only one account name--this is because the software is programmed to automatically assign one of the accounts. For example, when using accounting software to write a check, the software automatically reduces the asset account
Cash and prompts you to designate the other account(s) such as Rent Expense, Advertising Expense, etc.. Some general rules about debiting and crediting the accounts are:

  • Expense accounts are debited and have debit balances
  • Revenue accounts are credited and have credit balances
  • Asset accounts normally have debit balances
  • To increase an asset account, debit the account
  • To decrease an asset account, credit the account
  • Liability accounts normally have credit balances
  • To increase a liability account, credit the account
  • To decrease a liability account, debit the account


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