On the previous post, you have probably learnt how chart of accounts is constructed with its digitization numbering system. This post describes terms and definitions used on the chart of accounts, thus (hopefully) helps you understand the chart even better.
Not only for starters, even seniors (management-level) may find it useful, particularly when setting up chart of accounts and its procedure for the first time. Though it is not necessary to include an entire dictionary of accounting terms in any general accounting manual, but it is useful to include those that are commonly used within the company’s transactions, as well as those that appear in its accounting software. Of particular importance are those terms that are unique to the industry within which the company operates. For example, the oil and gas, software, and movie industries have special terminology that cannot be learned through regular accounting classes.
Developing chart of accounts and its procedure for the first time, the definitions provided, on the manual book, should be concise and meaningful. One or two sentences of definition are usually sufficient. Because the definitions are references sources, they should be developed for quick and easy look-up. For example, the definition for “fixed asset” may be listed under “A,” using the header “Asset, fixed.” If a user goes to the “F” section of the definitions, there should be a referral statement, such as “Fixed asset, see Asset, fixed. This standard indexing method should make it as easy as possible to find a specific definition.
A different approach to the inclusion of accounting term definitions in the manual is to define every account listed in the chart of accounts. By doing so, any accounting personnel who are responsible for entering transactions into either the general ledger or its supporting journals will have a better idea of which accounts should be used. This can save a great deal of time later on, when incorrectly applied transactions must be researched and corrected.
The following sample definitions are used for the three-digit sample chart of accounts that was described in my previous post (Chart Of Accounts):
010 – Cash – Money deposited at the bank. If there are restrictions on deposited cash, then it is accounted for as a long-term asset.
020 – Petty cash – Money retained in the petty cash box.
030 – Accounts receivable – Money due from customers for services received or products shipped, but not yet received. If there are amounts due from officers or employees, these moneys are listed under “other accounts receivable.”
040 – Reserve for bad debts – A reserve fund that is held as a contingency against the Non-payment of outstanding accounts receivable. This account should always have a credit balance.
050 – Marketable securities – Cash that is invested in easily traded equity or debt securities. The cost of acquiring these securities is included in the account.
060 – Raw materials inventory – The amount of materials kept on hand for eventual inclusion in finished goods. All freight costs associated with the acquisition of raw materials are included in this account.
070 – Work-in-process inventory – The cost of partially completed units of production. Costs stored in this account include raw materials, and any raw materials or overhead used to date.
080 – Finished goods inventory – The cost of completed products that have not yet been shipped to customers. Costs stored in this account include all raw materials, direct labor, and overhead used during the production process.
090 – Reserve for obsolete inventory – A reserve fund that is held as a contingency against the eventual write-off of any types of inventory that no longer have a resale value.
100 – Fixed assets—Computer equipment – Purchased computer equipment exceeding the corporate capitalization limit that has an expected life of greater than one year.
110 – Fixed assets—Computer software – Purchased computer software exceeding the corporate capitalization limit that has an expected life of greater than one year.
120 – Fixed assets—Furniture and fixtures – Purchased furniture exceeding the corporate capitalization limit that has an expected life of greater than one year.
130 – Fixed assets—Leasehold improvements – Improvements made by the company to its leased properties, exceeding the corporate capitalization limit, that has an expected life of greater than one year.
140 – Fixed assets—Machinery – Purchased production equipment exceeding the corporate capitalization limit that has an expected life of greater than one year.
150 – Accumulated depreciation—Computer equipment – The total of all depreciation charged against the computer equipment fixed asset account, net of disposed assets. This account has a credit balance.
160 – Accumulated depreciation—Computer software – The total of all depreciation charged against the computer software fixed asset account, net of disposed assets. This account has a credit balance.
170 – Accumulated depreciation—Furniture and fixtures – The total of all depreciation charged against the furniture and fixtures fixed asset account, net of disposed assets. This account has a credit balance.
180 – Accumulated depreciation—Leasehold improvements – The total of all depreciation charged against the leasehold improvement fixed asset account, net of disposed assets. This account has a credit balance.
190 – Accumulated depreciation—Machinery – The total of all depreciation charged against the machinery fixed asset account, net of disposed assets. This account has a credit balance.
200 – Other assets – An account in which minor asset items are stored that do not fit into any other asset account categories.
300 – Accounts payable – Both billed and accrued commitments to pay suppliers for services rendered or products shipped to the company.
310 – Accrued payroll liability – An obligation to pay wages to employees, but which has not yet been paid.
320 – Accrued vacation liability – An obligation to pay for earned vacation time to employees, but which has not yet been paid.
330 – Accrued expenses liability—Other – An account in which minor accrued expenses are stored, or those accrued expenses are stored, that do not occur on a recurring basis.
340 – Un-remitted sales taxes – Sales taxes to government entities that are a company obligation to make as a result of selling products or services into the geographic areas governed by those entities, but which have not yet been made.
350 – Un-remitted pension payments – Pensions payments that are an obligation of the company to make into the employee pension fund, but which have not yet been made.
360 – Short-term notes payable – Debt obligations that are due for payment in less than one year.
370 – Other short-term liabilities – An account in which minor liability items are stored that do not fit into any other liability account categories.
400 – Long-term notes payable – Debt obligations that are due for payment in more than one year.
500 – Capital stock – The amount of funds received from investors in exchange for the issuance of common or preferred stock.
510 – Retained earnings – Total corporate earnings since the creation of the company, less dividends and any prior period adjustments.
600 – Revenue – The sale of products or services, or receipts from investments, such as interest, royalties, or dividends.
700 – Cost of goods sold—Materials – The direct cost of materials associated with the sale of a tangible product. This includes all materials listed on a product’s bill of materials, plus all scrap incurred during production, less the resale value of any by-products.
710 – Cost of goods sold—Direct labor – The labor expense required to produce a product or service, which is limited to assembly labor.
720 – Cost of goods sold—Manufacturing supplies – The cost of supplies consumed when a product is manufactured. This includes all incidental machinery maintenance supplies and packaging materials.
730 – Cost of goods sold—Applied overhead – The cost of manufacturing, excluding materials, direct labor, and supplies. Includes depreciation on manufacturing equipment and facilities, as well as factory administration, indirect labor, maintenance, production
Employee’s benefits, quality control and inspection, production facility rent, repair expenses, rework labor, and spoilage.
800 – Bank charges – The expense associated with credit card fees, bank service charges, and the cost of printing checks.
805 – Benefits – The expense associated with medical insurance, dental insurance, long-term and short-term disability insurance, and health club reimbursement fees. All employee payroll deductions to co-pay benefits should be credited against this account.
810 – Depreciation – The expense associated with the periodic reduction of the value of fixed assets, in accordance with a standard value-reduction methodology.
815 – Insurance – The expense associated with key-man life insurance, business insurance, and workers’ compensation insurance.
825 – Office supplies – The expense associated with miscellaneous tangible office purchases, such as paper products, printer cartridges, and diskettes.
830 – Salaries and wages – The expense associated with employee pay, which includes salaries, wages, severance payments, signing bonuses, and accrued wages.
835 – Telephones – The expense associated with “800” phone service, incoming phone lines, and cell phones. The cost of phone equipment is charged either to office supplies or to fixed assets, depending upon the dollar-value purchased.
840 – Training – The expense associated with outsourced training suppliers, tests, and purchased training materials. It does not include travel costs associated with employee travel to training classes, nor the salary cost of in-house training personnel.
845 – Travel and entertainment – The expense associated with the travel of either employees or reimbursed contractors. Includes air fare, lodging, parking, and meals.
850 – Utilities – The expense associated with water, heat, waste removal, and electricity fees charged by utilities.
855 – Other expenses – Includes all incidental expenses under $500 that do not readily fall into any other category. Consult with the assistant controller before making entries into this account.
860 – Interest expense – The expense associated with the interest cost of revolving debt, interest on late payments to suppliers, and outstanding company bonds. Also includes accrued interest on unpaid interest expenses.
900 – Extraordinary items – Any expense that is both unusual and infrequent, such as a gain on a troubled debt restructuring or the loss of foreign assets due to governmental expropriation. No entries to this account are allowed without the controller’s approval.
Other Common Terms and Definitions Used for Chart of Accounts
Other definitions for accounts that are commonly used by the accounting staff include:
1. Travel and Subsistence
Meals and lodging: Includes meals and lodging costs (hotel, motel, etc.) in accordance with company policy for reimbursement. Per diem allowances for meals and lodging are included here.
Travel in private vehicle: Includes travel in employee-owned vehicles at the
currently approved mileage reimbursement rate.
Travel in rented vehicle: Includes daily car rental fees from outside providers.
Travel in public carrier: Includes air, bus, and train travel.
Travel in motor pool vehicles: Includes charges for the use of company-owned vehicles at the approved rates. Costs of air travel for the company-owned air plane are included here.
Other travel costs: Includes such incidental expenses as tips, telephone calls, taxis, tolls, and parking while on a company-authorized trip. Tips on meals are included in meal costs.
Conference and registration fees: Includes registration fees for seminars, work shops, conferences, and similar meetings. Tuition for schools and workshops is included here. If meals and lodging fees included in registration fees cannot be separated, then they are included here.
Postage: Includes postage charges for mailing, as well as service and rental fees for postage machines, and periodic service fees charged by online postage providers.
Express postage: Includes all freight costs for express delivery services, including
Cell phones: Includes the basic monthly fees, as well as roaming charges, for all issued cell phones.
Telephone local service: Includes the basic monthly charges for all phones.
Telephone long distance: Includes the charges for all long distance services, including the WATS line, line rentals, and telegraph charges.
Telephone installation and maintenance: Includes all charges for the installation of phones and subsequent maintenance of the phone system.
Advertising: Includes the cost of classified advertising for employee hiring, as well as required advertising for published purchasing bids.
Publicity and public information: Includes the cost of radio, television, and live shows promoting the company, as well as related layout and copy costs.
Rental of buildings and floor space: Includes payments to others for buildings, rooms for events, and floor space in buildings for special events. Rental of housing facilities and meeting rooms is included here.
Rental of computer equipment: Includes the rental or lease cost of computer software and equipment, such as payments on operating leases.
Other rentals: Includes any rental that cannot be recorded in other rental accounts.
5. Repairs and Maintenance
Repairs, streets and parking: Includes repairs and other maintenance on roads, streets, drives, and parking lots.
Repairs, building and grounds: Includes wages and material costs of repairing, cleaning, and maintaining buildings and grounds. Outside contractor costs for this purpose are recorded here.
Repairs, office equipment: Includes the costs of repairing and maintaining office equipment such as furniture, copiers, and facsimile machines. It does not include maintenance on the phone system.
Maintenance contracts, equipment: Includes the annual contract costs for maintenance contracts on office equipment.
Repairing and servicing other equipment: Includes the costs of repairing and servicing machinery, engineering equipment, laboratory equipment, shop equipment, and other equipment not classified in the preceding repair accounts.
6. Fees, Professional
Engineering fees: Includes out-of-pocket fees for professional engineering services.
Auditing fees: Includes the costs of auditing fees to outside independent auditors. Other incidental costs of the audit, such as supplies, telephone, postage and printing charges related to the audit, are included here.
Medical fees: Includes direct payments to others for medical services, including pre-employment physicals and lab tests.
Legal fees: Includes all fees paid to attorneys, appraisers, notaries, and witnesses, in addition to court costs and legal document recording fees.
Laboratory and testing fees: Includes outside laboratory fees and fees paid to outside agencies for testing services other than medical services.
Consultant expense reimbursements: Includes travel costs paid to consultants and other non-employees.
7. Other Contractual Services
Insurance and fidelity bonds: Includes the cost of all casualty and liability insurance and fidelity bond coverage.
Dues: Includes approved dues for company memberships in professional organizations.
Subscriptions: Includes the cost of subscriptions to newspapers, magazines, and periodicals.
Computer software acquisitions: Includes the initial cost of acquiring operating or systems software packages. Included is the purchase price, related freight, and software manuals.
Computer software maintenance: Includes the annual maintenance fees to maintain purchased software systems.
8. Maintenance Supplies
Land improvement supplies: Includes asphalt, cement, joint fillers, curbing, and so forth used in repairing or replacing roads, sidewalks, and parking lots on company property.
Building construction supplies: Includes lumber, caulking, steel, fabricated metal parts, flooring, ceiling tiles, plaster, lime, and other materials used in repairing or renovating buildings.
Paints and preservatives: Includes interior and exterior paints, wood preservatives, and road striping materials used for remodeling or maintenance.
Hardware, plumbing, and electrical supplies: Includes all hardware, plumbing parts and accessories, and electrical wire or parts, including lights used in maintaining or renovating buildings.
Custodial supplies and cleaning agents: Includes all custodial supplies of an expendable nature, such as cloths, brooms, cleaning compounds, mops, or pails.
9. Office Supplies
Printing, binding, and padding: Includes the cost of printing, binding, and padding paid to outside contractors.
Duplication and reproduction: Includes the paper, toner, and other supplies used in the company copy machines.
Office supplies: Includes all office supplies and materials, such as pens, paper, pencils, staples, paper clips, and so forth.
10. Equipment Supplies
Fuels: Includes vehicle fuels (gasoline, diesel fuel, propane) purchased for motor pool vehicles or airplanes.
Lubricating oils and greases: Includes lubricating oils and greases used for all vehicles and machinery.
Tires and tubes: Includes the purchase of tires and tubes for all vehicles in the company motor pool.
Repair and replacement parts: Includes the purchase of vehicle and machinery repair and replacement parts and supplies.
Shop supplies: Includes the cost of shop supplies, such as shop rags, windshield cleaner, glues and cements, brushes, degreasers, solvents, and so forth, used in equipment repair and maintenance operations.
Small tools: Includes small tools used in manufacturing operations that are below the corporate capitalization limit.