What is a chart of accounts?
An account framework in accounting describes the framework for a company’s bookkeeping . It divides the various postings into sensible, logical, comparable and, last but not least, comprehensible categories for the annual financial statements and audits.
As a sole proprietorship , limited liability company or stock corporation , you are obliged to keep records of your income and expenses as well as your assets and liabilities . Every year you have to prepare an annual financial statement with an income statement and a balance sheet for the bookkeeping – possibly together with your tax advisor . In order to structure this work and make it controllable by an auditor or the tax office, you follow a Datev chart of accounts.
The chart of accounts contains rules for naming and categorizing your accounts in accounting. This means that there are assignments and corresponding booking accounts for all financial transactions that you can carry out in your company. In Germany there are already various standards that you can choose from for your company. So you don’t have to start from scratch.
How do charts of accounts work?
Basically, you have the choice between the two most frequently used standard accounts, which, by the way, also form the basis of the most common accounting software: The SKR 03 and the SKR 04 . The use of standards facilitates the handling of bookings and reviews on the one hand and benchmarking between different companies on the other .
In the accounting system, charts of accounts specify rules for the chart of accounts, i.e. the detailed set of rules for posting in your company. The account framework primarily defines account classes; the first numerical position in the account framework indicates the account class. Regardless of what type of account frame you are using, the following classes must be present:
- Fixed and current assets
- Equity and debt
- Income and Expenses
- Sums and balances carried forward
- as well as statistical accounts
These are divided into ten groups (0-9) in all the usual chart of accounts . Based on the Datev chart of accounts and its rules, you can create the appropriate account names for your company based on the chart of accounts.
The SKR 03 follows the process structure principle . The chart of accounts corresponds to the business processes here. The assignment of business transactions to financial transactions is seen in SKR 03 from the business process. For the annual financial statements, the accounts are assigned differently in accordance with the applicable accounting rules.
The SKR 04, in turn, is based on the closing structure principle . This means that the account classes are designed so that the corresponding financial transactions take place in the categories relevant for the annual financial statements.
What types of chart of accounts are there?
1. Standard chart of accounts (SKR)
Standard chart of accounts make it easier for you to define the accounts in your bookkeeping. Coordinate with your accountant about the use of the appropriate SKR. General SKR that are suitable for all industries:
- SKR 03 is based on company processes
- SKR 04 is based on the structure of the annual financial statements
For some industries there are predefined charts of accounts that are adapted to the respective circumstances. In the catering and hotel trade you will find accounts for purchasing raw materials, while this account does not play a role in the automotive trade and industry. On the other hand, you book personnel costs in your own workshop if you run a car dealership. Sector-specific SKR are useful so that not all companies have to create and maintain all accounts, including irrelevant ones. Furthermore, companies in the same branch of industry can be compared financially more easily in this way.
The most common industry SKRs at a glance:
- SKR 14 Agriculture and Forestry
- SKR 30 retail
- SKR 49 clubs
- SKR 51 motor vehicle trade
- SKR 70 catering or hotel industry
- SKR 80 dentists
- SKR 81 doctors
- SKR 99 hospitals and homes
2. Industry chart of accounts (ICR)
Like SKR 04, the IKR follows the structure according to the balance sheet and income statement. It was created by the Federal Association of Industry and applies to all industrial companies in Germany and is therefore a widely used standard.
3. Joint account framework (GKR)
Like SKR 03, the GKR follows the process structure principle, which means that the ten account classes correspond to the respective business processes. The IR and the GCC exist in parallel.
How is a chart of accounts structured?
Based on the ten account classes mentioned above, the chart of accounts contains accounts with four-digit numerical names from 0001 to 9999. Using an example for an invented account 1731, you can see how a chart of accounts is basically structured:
- The first position stands for the account class : It bundles the accounts that are similar in nature and content, for example 1 for fixed assets
- The second position stands for the account group : It defines in more detail which assignment the account belongs to within the class mentioned, for example 7 for liabilities
- The third digit stands for the account subgroup : It further details what type of account it is, for example 3 for liabilities to companies
- The fourth digit stands for the individual accounts or account numbers : It specifically describes which property the account refers to, for example 1 for the remaining term of up to 1 year
If you are aware of this logic, you can very quickly find the right account for a given booking in practice.
Four-digit accounts stand for so-called G / L accounts, which relate to material or object-related transactions. For example, if you write the costs for your company car, the telephone bill, the purchase of a new PC or the rent of your office, this is done on a general ledger account. There are also personal accounts that deal with the debtors or debtors and the creditors or creditors of your company. You can also group the corresponding accounts here based on numerical names.
What is a chart of accounts?
A chart of accounts is an individual chart of accounts created for your company. You may follow one of the standard chart of accounts and develop your own chart of accounts with the given rules. The standard chart of accounts forms the background for bookkeeping in the finance department and the other departments. That is why it makes sense to provide all colleagues not only with individual account numbers, but also with the entire chart of accounts for your company, kept as brief as possible.
Before creating a chart of accounts, it is worthwhile to consider various considerations.
Process-oriented or conclusion-oriented?
Which approach is the most logical and sensible for you and your colleagues as well as your tax advisor? Keep in mind that both day-to-day bookings and the preparation of the annual financial statements take time.
Briefly or in detail?
If you keep your chart of accounts very tight, you can memorize it more easily and have to look up less often. On the other hand, you won’t necessarily find a place for every detailed booking. Do you have to differentiate between coffee purchases and paper plates, for example, or is the collective term “canteen supplies” enough? Also consider the legal requirements for the distinction, for example for different travel expenses and their VAT deduction.
Manually or Automatically?
If you are thinking of using online accounting software, it can make sense to follow the given chart of accounts as far as possible. This makes your bookkeeping easier and both the software and the support can help you better with questions. For small businesses and start-ups, this is often the easiest solution.
However you design your company’s own chart of accounts, you can get advice from relevant internet forums or from your tax advisor.