Chart Of Accounts

The Chart of Accounts forms the blueprint of your organization. The overall structure of your Chart of Accounts is based on a system of double entry accounting that has become a standard all over the world to quantify how a company is doing financially.

The Chart of Accounts helps you to answer questions like:

  • What is your organization worth?
  • How much debt have you taken?
  • How much profit are you making (and hence paying tax)?
  • How much are you selling?
  • What is your expense break-up

As someone managing a business, it is very valuable to see how well your business is doing.

Tip: If you can’t read a Balance Sheet it's a good opportunity to start learning about this. It will be worth the effort. You can also take the help of your accountant to setup your Chart of Accounts.

Chart of Accounts is a tree view of the names of the Accounts (Ledgers and Groups) that a Company requires to manage its books of accounts. ERPNext sets up a simple chart of accounts for each Company you create, but you have to modify it according to your needs and legal requirements. For each company, Chart of Accounts signifies the way to classify the accounting entries, mostly based on statutory (tax, compliance to government regulations) requirements.

1. How to create/edit Accounts

  1. Go to: Accounts > Chart of Accounts Here you can open group accounts. There are options to “Add Child” in an account, edit or delete the account.

    Chart of Accounts

  2. The option to create a child account will only appear if you click on a Group (folder) type Account.
  3. Enter a name for the account.
  4. Enter a number for the account.
  5. Tick Is Group if you want this to be a parent account.
  6. Select the account type.
  7. Optionally, change the currency, by default it's the company's currency.
  8. Click on Create New.

ERPNext creates a standard structure for you when the Company is created but you can modify to add or remove accounts.

Typically, you might want to create Accounts for:

  • Travel, salaries, telephone, etc. under Expenses.
  • Value Added Tax (VAT), Sales Tax, etc. under Current Liabilities.
  • Product Sales, Service Sales, etc. under Income.
  • Building, machinery, furniture, etc. under Fixed Assets.

Let us understand the main groups of the Chart of Accounts.

Chart of Accounts

2. Account Types

2.1 Balance Sheet Accounts

The Balance Sheet has Application of Funds (/assets) and Sources of Funds (Liabilities) that signify the net-worth of your company at any given time. When you begin or end a financial period, all the Assets are equal to the Liabilities.

Accounting: If you are new to accounting, you might be wondering, how can Assets be equal to Liabilities? That would mean the company has nothing of its own. Thats right. All the “investment” made in the company to buy assets (like land, furniture, machines) is made by the owners and is a liability to the company. If the company would want to shut down, it would need to sell all the assets and pay back all the liabilities (including profits) to the owners, leaving itself with nothing.

All the accounts under this represent an asset owned by the company like "Bank Account", "Land and Property", "Furniture" or a liability (funds that the company owes to others) like "Owners funds", "Debt" etc.

Two special accounts to note here are Accounts Receivable (money you have to collect from your customers) and Accounts Payable (money you have to pay to your suppliers) under Assets and Liabilities respectively.

2.2 Profit and Loss Accounts

Profit and Loss is the group of Income and Expense accounts that represent your accounting transactions over a period.

Unlike Balance sheet accounts, Profit and Loss accounts (or PL accounts) do not represent net worth (/assets), but rather represent the amount of money spent and collected in servicing customers during the period. Hence at the beginning and end of your Fiscal Year, they become zero.

In ERPNext it is easy to create a Profit and Loss analysis chart. An example of a Profit and Loss analysis chart is given below:

Financial Analytics Profit and Loss Statement

(On the first day of the year you have not made any profit or loss, but you still have assets, hence balance sheet accounts never become zero at the beginning or end of a period)

2.3 Groups and Ledgers

There are two main kinds of Accounts in ERPNext - Group and Ledger. Groups can have sub-groups and ledgers within them, whereas ledgers are the leaf nodes of your chart and cannot be further classified.

Accounting Transactions can only be made against Ledger Accounts (not Groups)

Info: The term "Ledger" means a page in an accounting book where entries are made. There is usually one ledger for each account (like a Customer or a Supplier).

Note: An Account “Ledger” is also sometimes called as Account “Head”.

Chart of Accounts

2.4 Account Number

A standard chart of accounts is organized according to a numerical system. Each major category will begin with a certain number, and then the sub-categories within that major category will all begin with the same number. For example, if assets are classified by numbers starting with the digit 1000, then cash accounts might be labeled 1100, bank accounts might be labeled 1200, accounts receivable might be labeled 1300, and so on. A gap between account numbers is generally maintained for adding accounts in the future.

You can assign a number while creating an account from Chart of Accounts page. You can also edit a number from account record, by clicking "Update Account Number" button. On updating account number, system renames the account name automatically to embed the number in the account name.

2.5 Other Account Types

In ERPNext, you can also specify more information when you create a new Account, this is there to help you select that particular account in a scenario like Bank Account or a Tax Account and has no effect on the Chart itself.

Explanation of account types:

  • Bank: The account group under which bank account will be created.
  • Cash: The account group under which cash account will be created.
  • Cost of Goods Sold: The account to book the accumulated total of all costs used to manufacture/purchase a product or service, sold by a company.
  • Depreciation: The expense account to book the depreciation of the fixed assets.
  • Expenses Included In Valuation: The account to book the expenses (apart from direct material costs) included in landed cost of an item/product, used in Perpetual Inventory.
  • Fixed Asset: The account to maintain the costs of fixed assets.
  • Payable: The account which represents the amount owed by a company to its creditors.
  • Receivable: The account which represents the amount owed to a company by its debtors.
  • Stock: The account group under which the warehouse account will be created.
  • Stock Adjustment: An expense account to book any adjustment entry of stock/inventory. Generally comes at the same level of Cost of Goods Sold.
  • Stock Received But Not Billed: A temporary liability account which holds the value of stock received but not billed yet and used in Perpetual Inventory.

2.6 Financial statements

Financial statements for your company are easily viewable in ERPNext. You can view financial statements such as Balance Sheet, Profit and Loss statement and Cash flow statement.

An Example of various financial statement are given below:

  1. Cash Flow Report: Cash Flow Report

  2. Profit and Loss Report: Profit and Loss Report

  3. Balance Sheet Report: Balance Sheet Report

  1. Opening Balance
  2. Accounts Settings
  3. Journal Entry
  4. Inter Company Journal Entry
  5. Accounting Reports
  6. Accounts Receivable
  7. Multi Currency Accounting