A list showing total number of accounts used by an organization is known as chart of accounts. Different businesses have different types of accounts and different number of accounts. Small organizations may have one or two thousand number of accounts but a big organization may have hundred thousand accounts. Therefore to manage all these accounts properly and efficiently a chart of accounts is very important. There are standard chart of accounts available for different businesses to use. For example, two organizations in the business of manufacturing will have similar chart of accounts. They use standard chart of accounts because it will be easy for them if they want a comparison with other organization in the same business or industry.
To create a chart of accounts, an organization must first define different accounts to be used by the organization and then specify each account an identification number. It is very important to allocate account numbers in a logical or coherent way and to follow specific industry standards.
The digits could be coded as follows:
Isolating every account by a few numbers will permit new accounts to be included (if needed, means business is growing) while keeping up the same logical order of numbering. Note that the numberings follow the order of financial statements as well i.e. first balance sheet accounts appear and then income statement accounts. First balance sheet (Asset accounts, liability accounts, Equity accounts) and then Income statement (Revenue account and Expense accounts)