In the business world, it is very important to have a meticulous record of all the money entering and leaving the organization, and how you plan to spend it in the future.
A catalog of accounts this is a type of document that serves to fulfill this purpose and while it may seem like a simple paper or digital file where the numbers are placed, the truth is that they are essential for any business that wants to stay afloat.
Let’s take a closer look at what they are, how they are made, what types of codes they use and what their structure is.
What is a catalog of accounts?
A catalog of accounts is a document used to record the operations of an organization. In other words, it serves to establish the structure of the company when accounting for business activities.
This type of documents they are very important in the field of accounting, Since they greatly facilitate the recording of economic transactions, systematizing all types of expenditure and income that have been made. Typically, account catalogs are organized in the following order: assets, liabilities, capital, income, costs, and expenses.
The regulations of each country allow companies to have a variable degree of freedom in the preparation of this type of document, adapting it to their needs and in a manner more suited to their commercial reality. The size of the catalog will always depend on the complexity of the business.
What are its main advantages?
Thanks to the fact that this type of document is generally very flexible, the workers of the company can strictly keep a record of all the operations of the same, taking into account any changes in the inflow and outflow of money from the organization.
In addition, thanks to a record, both in paper and digital format, we have a document that shows how the cash flow is paid to the company, both when it comes in and when it leaves, specifying how it goes and in what amount. Thanks to this, in case of making budgets for various purposes, it is possible to make a much more precise estimate of what will be needed or spent.
How is it done?
When designing an account catalog, it is very important to know what transactions take place in the company. In this way, sufficient data will be obtained from the administration of the company.
Also because each country has different regulations regarding the organization of the company and the associated taxes (Like VAT or personal income tax) it is important to look at the regulations in force and see if the company has something to resolve.
A very important aspect when developing a catalog of accounts is this must accept changes in the future, Since it can always happen that you were billed or paid for a service that was ultimately not provided or that some data was entered incorrectly.
When collecting data, it is very important to consider the following aspects of the business:
- Financial data by department.
- Regional data.
- Tax obligations.
- Main sources of profit.
To facilitate the processing of data by account book counters and forks, the following encoding is commonly used in account catalogs:
- 1 to 000X per asset.
- 2-000X for passive.
- 3-000X for capital.
- 4-000X for income.
- 5-000X for costs.
- 6-000X for expenses.
As we have seen, account catalogs must have a number of features in place so that they can be of real benefit to the company and its employees. Below, we’ll take a closer look at these features.
Flexible means that the account catalogs they must be able to authorize someone to add new accounts, depending on the reality of the company.
Sometimes it happens that while preparing these types of documents, you forget to add the expenses or earnings. Therefore, since money is never left out in business, it should be recorded in the document, even if it is added later.
cal that the various transactions of the organization are coded unambiguously and with the minimum of ambiguity possible. The symbols or codes used for costs, liabilities, assets, etc., should be the least similar to each other. The idea is to avoid any sort of confusion.
Account catalogs they should facilitate the possibility of grouping accounts that have some sort of relationship, (For example, expenditure on construction materials: wood, bricks, cement, etc.)
A catalog of accounts should not be drawn up as if it were the Calixtinian Codex. Symbols used should be easy to remember and manageable for members of the company.
It is not at all functional a catalog of accounts which is written in such a way that the user has to consult, again and again, what the codes or the letters of a manual mean.
Main types of account catalogs
There are different types of account catalogs depending on the type of coding system they use. Here are the top five.
1. With alphabetical system
To denote assets, liabilities, capital, income, costs and expenses, letters are used. For example, “A” is for assets, “B” for liabilities, “C” for capital …
2. With decimal system
To refer to the various tax terms mentioned above, a numbering from 0 to 9 is used. For example, 0 is active, 1 is passive …
3. With digital system
The account catalogs they use a digital system classifies all the organization’s accounts into groups and sub-groups, By assigning them a number for each type of transaction. For example, 1 – assets, 11 – current assets, 11-10 cash …
4. With mnemonic system
Accounts are classified so that it can be easily memorized the way they are mentioned in the catalog. For example, the letter “A” can be used for assets and the letter “P” for liabilities, etc. Then lowercase letters are used to refer to subgroups. For example, for current assets, “Ac” could be used.
Needless to say, while this makes it easier for them to learn, it has actually been little used since. there is always a small risk that ambiguities arise, Especially between subgroups.
5. With combined system
Basically, these are account catalogs that use coding systems that combine two of the aforementioned systems.
What is its structure?
There are three notable elements in the catalogs of accounts.
The accounting element is which allows the general balance sheet of the company to be divided into different types of accountsIn other words, what are the assets, what are the liabilities, what are the costs …
These are each of the lines that make up assets, liabilities, capital and others.
The sub-accounts are all these elements that make up a main account.
- Marsden, SJ, (2010). Australian Accounting Guide. 3rd ed. Sydney: CCH Australia Limited.
- Clarke, Edward A (2012). Accounting: Introduction to Principles and Practice, 7th Edition. Cengage Learning Australia Pty Ltd. pages 106–109.