The chart of accounts generally lists income and expense accounts starting with revenue accounts, with accounts for operating revenue and non-operating revenue; then cost of sales accounts, followed by operating expenses, and finally, non-operating expenses. These are the accounts from which the income statement will be generated, and will be the accounts needed to prepare tax returns.
Revenue
The revenue, or income accounts that are set up on the chart of accounts will depend on the nature of your business. Sales is a general account, and you may want to break it down into separate sales accounts by product, market, type of job or work, or any criteria that is meaningful to you. What is important is to record sales in the way you want to analyze and report them. Offsetting accounts, which would generally carry a debit balance include sales returns and allowances, and sales discounts.
Some other commonly used operating revenue accounts include rentals, services, commissions, fees, and royalties.
Non-operating revenue accounts include all types of income that you receive that are not part of your main line of business. These include interest income, dividends, and gains or losses on investments (unless you are in the financial business, in which case these would be operating revenue accounts), equity in income or loss of affiliates, if applicable, gain or loss on the sale of assets, scrap sales, translation gains or losses, and miscellaneous or other income, for any income that doesn’t fit into another account.
Cost of Sales or Cost of Goods Sold
Some of the accounts that make up cost of sales are purchases, purchase returns and allowances, trade discounts, freight, and transportation charges. In a production environment, manufacturing cost may be broken down into raw materials, direct labor, indirect labor, small tool replacement, spoilage, shrinkage, production supplies, maintenance supplies, repairs, utilities, property taxes, research and development, depreciation and amortization. If a standard cost accounting system is used, there will be standard and variance accounts set up in this section of the chart of accounts.