How does the Chart of Accounts Work & Why is it Important?

The chart of accounts is like an index.

In simpler terms, imagine you have a closet with different rows (your chart of accounts). One row you’ll put your jumpers in, the other row your dresses and then the final row you put your trousers (the rows are like accounts, so you know where to put a transaction e.g. a sales transaction will go in the sales account, the telephone bill will go in a telephone account, just so everything’s neatly sorted). If you take a picture of that closet with its rows, you’ll have a picture of the things in there (your financial report).

Here’s an illustration.

So why is it so important?

Well… it helps you to organise things better and then have clear financial reports… which in turn gives you INFORMATION to make the right decisions for your business.

A messy chart of accounts, or transactions being put in the wrong accounts is like a closet with clothes in the wrong row. It takes ages to find what you’re looking for and then to sort it all is a headache!

Find out What’s in A Chart of Accounts - Assets, Liabilities, Equity, Revenue, Expenses & What they Mean.

Next: Using Xero - An Activity for Beginners

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