What are Account Numbers and What Do They Mean?
In bookkeeping each of your accounts, such as your bank account, credit card account, expense account, etc are ordered in a Chart of Accounts and assigned an Account Number. Quickbooks has the option to use account numbers, and Xero requires that you number your accounts on the chart of accounts, but what exactly do those numbers mean, what purpose do they serve?
What do Account Numbers Mean?
Account numbers are basically a categorizing system. Accounts fall under a certain category such as assets, liabilities, equity, etc. and the account number for an individual account helps describe what type of account it is.
For example, a checking account and a savings account might be numbered 101 and 102, falling within the 100s along with all other asset accounts. Liability accounts could be assign numbers within 200s. Some people prefer to use four digits instead of three (e.g. 2000 instead of 200) if they have lots of account lines.
Below is an example of the types of accounts that would be asset account, liabilities, equity, etc and the subsequent account numbering system that is typically applied:
Assets (100): What is owned by and owed to the business
101 Bank – Any Cash Account (Checking, Savings, Money Market, CD, Petty Cash).
102 Accounts receivable – Money owed by Customers to the business for goods or services.
103 Other Current Asset – Asset that is expected to be used or sold in less than 1 year. Short term investments, inventory.
104 Fixed Asset – Any depreciable equipment, buildings or property.
105 Other Asset – Prepaid expenses, long-term investments
Liabilities (200): What is owed by the business to others
201 Accounts Payable (A/P) – Money owed to Vendors by the business
202 Credit Card – Vendor Credit Account, special kind of account payable that reconciles like a bank account.
203 Other Current Liability – Short term (less than one year) loans and payroll taxes.
204 Long Term Liability – Loan payable over more than one year (long-term lease, mortgage)
Equity (300): Net worth of the business. (Assets less Liabilities)
301 Equity – Owner’s money in/out of the business, net gain/loss from prior years, or stock.
Income (400): Money into the business
401 Income – Money earned by the business for its principal activities (sale of goods/services)
402 Other Income – Unearned Revenue (interest income, gifts received, personal income)
Cost of Goods Sold (500): Necessary costs to produce items sold
501 Cost of Goods Sold – direct costs of goods/services sold (subcontractors, raw materials, some wages, some shipping costs to deliver goods to end users)
Expense (600): Money Out
601 Expense – General Costs of doing business (overhead, utilities, administrative staff, rent)
602 Other Expense – Costs not associated with doing business (personal expenses, interest expense)
*other income/expense might get 700, 800, or 900 numbers
The number you assign determines the order of accounts in the Chart of Accounts, breaking alphabetical sorting.
Other than helping with organizing, account numbers don’t really serve any purpose for small business (“enterprise” level software might need them for consolidated financial statements) so don’t worry too much about getting the “right” number. Your CPA will let you know if they have a preference or suggestions.