In a properly structured Chart of Accounts, the goal of simplicity is balanced with the desire for detail. A poorly designed COA can be either a simple list of G/L accounts, where new ones are just added without regard to existing accounts wherever they will fit, or, on the other extreme, dis-similar things coded to accounts which makes meaningful management difficult and confusing. Ultimately, our primary concern is being able to obtain useful and meaningful and consistent reporting for management as well as outside users
A proper chart of accounts has a numbering scheme where the number series have meaning, usefulness, logic, structure, and room for growth, for instance; 1000 Asset accounts, 2000 Liability accounts, 3000 Equity accounts, 4000 Income accounts, 5000 Cost of Goods Sold accounts, 6000 S.G. & A. accounts, 7000 to 9999 for miscellaneous and below the line accounts.
This structure not only creates consistency, as in, a 2000 series account is always a liability type account, but also allows for expansion and addition of accounts as warranted, as well as accounts unique to a specific business.
One of the basic rules for 1000-3999, the Balance Sheet accounts, is that the order of accounts should be from the most current, or nearness to cash, to the least. For the total assets of each entity, cash and checking accounts are listed first, followed by inventory, followed by equipment, the least liquid of the assets.
The liability side presents who has a claim on those assets, short term, or current liabilities are listed first, long term liabilities last, the reasoning is that current is due first, and to allow a comparison of current (less than 1 year) liabilities verses current assets.
Equity should reflect the nature of the residual value (Assets minus Liabilities) by showing opening equities, additions of capital, distributions, retained earnings of previous years, and the current year’s earnings.