Prior to setting up an accounting system, a list is prepared showing each item for which a ledger account is to be maintained. This list is called ‘the Chart of accounts’. The accounts on the list are numbered in a way that facilitates summarization of detailed accounts into account categories for the financial statements. For example, the beginning of a chart of accounts might appear as follows:
1 - - Current Assets
1 1 - Cash
1 1 1 Cash, First National Bank
1 1 2 Cash, Second National Bank
The actual accounting entries are made in the lowest-level accounts, which are 111 and 112 in the example.
There are at least as many separate accounts as there are items on the balance sheet and income statement. Usually there are many more accounts than this minimum numbers, so that detailed information useful to management can be collected. For example, although only the single item “Accounts receivable” appears on the balance sheet, a separate account for each customer is maintained in a ledger. Management’s desire to have small account so that information can be built up and summarized in any of several ways, can lead to proliferation of accounts. With a manual system, the sheer bulk of number of ledger pages limits the proliferation. In a computer-based system, the constraints are much less severe