Using a pre-defined chart of accounts that you find in a bookkeeping or accounting software package may work fine for your business. Or you may find that you need to adapt or accommodate the chart of accounts to more closely fit the way you want to keep track of and report on your business.
The chart of accounts is really the starting point for your bookkeeping and accounting. It is a listing of all the accounts that will be used to record business transactions and accounting entries. Each transaction that is recorded, and each accounting entry that is made will be posted to an account that has been set up in the chart of accounts, which then forms the outline from which financial statements and reports will be generated.
General Considerations
The following are some considerations to keep in mind when using a particular chart of accounts, adapting one, or building one from scratch:
What financial information do you need to manage your business?
What financial reporting will you be doing, and to whom?
What information will you need to prepare your tax returns?
Is your business subject to any special regulatory reporting requirements?
Level of Detail
Another consideration is the level of detail that should be contained in the chart of accounts. A very general chart of accounts, with only broad categories of accounts, may facilitate bookkeeping but may not provide you with much in terms of analysis capability. And, on the other hand, a very complex chart of accounts may make bookkeeping cumbersome and difficult. In general, the chart of accounts should be broken down into the level of detail you are capable of, and interested in managing, provided it meets the necessary requirements in terms of financial, tax, and regulatory reporting.
Coding
Generally, in accounting or bookkeeping software, codes are assigned to identify the various accounts. The numbering scheme may be pre-established or you may need to set it up yourself. Number ranges can be used to define major account categories and sub-categories, with individual numbers assigned to each account within a given range. Here it is important to have a logical numbering sequence that is sufficiently broad, and flexible enough to allow you to add accounts as necessary, to meet the ongoing needs of your business as it evolves and grows.