Chart of accounts

No statute or regulation defines a chart of accounts, so each business sets up its own. In practice, the accounts are usually numbered by type, and new ones are added as the business needs them. IRS Publication 583 describes the same five types of ledger account. Its name for equity is net worth, meaning the excess of assets over liabilities.

The chart is only the list, and the general ledger is where each account’s entries and totals are kept. In double-entry books, every transaction is a debit in one account and a credit in another. Total debits must equal total credits, and totals that do not match point to an error.

In practice, a return is easiest to prepare when each cost it reports on its own line has its own account. For cost of goods sold, Schedule C asks for four cost lines: purchases, cost of labor, materials and supplies, and other costs. Publication 583 says your books must show your gross income, deductions and credits.

Asset accounts carry the cost of equipment and property from year to year. The return needs those records for depreciation and for the gain or loss on a sale. The IRS says to keep them until the period of limitations ends for the year of a taxable disposition, such as a sale. That period is the time in which the IRS can assess more tax, generally three years after the return is filed.