A Detailed Guide To Setup Chart Of Accounts in ERPNEXT

Effective financial management is vital for the growth of any organization. ERPNext plays a vital role in establishing the strong foundation for optimizing the Financial Performance of any organization.Central of these is the Chart of Accounts tool for setting up Accounts efficiently in the system and have a structural Framework for categorizing and monitoring the financial transactions. This guide will take you to the unique chart of accounts that will align with your business requirements.

What is a Chart Of Accounts ?

Chart of Account is an Organized Framework of all financial accounts that captures all tractions within an organization.

Key Features of Chart Of Accounts: 

• Account Categories: Assets, liabilities, Income , Expenses and Equity.
• Hierarchical Structure: Parent child relationship for Better Organization.
• Flexibility:Customizable to Suit Business Specific Need.

Foundational Structure:

1. Group Accounts: Start by establishing the Primary group as Assets, income, liability and expense.These represent the major categories of your financial accounts.
2. Sub-Groups (Optional): Further categorize these groups for better organization. For example, under Assets, you might have sub-groups like "Current Assets" and "Fixed Assets."

Creating Ledger Accounts:

Define accounts within each group or sub-group. These are the specific accounts where your transactions will be recorded. Examples include:

• Assets: Cash, Bank Accounts, Accounts Receivable, Inventory
• Liabilities: Accounts Payable, Loans Payable
• Equity: Share Capital, Retained Earnings
• Income: Sales Revenue, Service Revenue
• Expenses: Salaries Expense, Rent Expense, Utilities Expense

Step by Step Guide for Setting Up the Chart Of Accounts

Setting up the Chart of Accounts (CoA) in ERPNext is an essential step to ensure accurate financial tracking. Follow the steps below to configure your CoA effectively:

Step 1: Access the Chart of Accounts

• Log in to your ERPNext Instance.
• Navigate to Accounting from the main dashboard.
• Under Accounting Masters, click on Chart of Accounts.
• You can directly access the Chart of Accounts from the Shortcuts in the Accounting module.

Step 2: Review Existing Accounts

Review the existing accounts to understand the default hierarchy.

Step 3: Add New Account

• To add a new account click on the + Add Account Button on the upper right corner.

• The interface will open with the fields. Fill in the required details and click on the Save button.

• While setting up an account you will encounter different account types .

• These Account Types are broad categories that classify financial transactions. They help in organizing and summarizing financial data for accurate reporting and analysis.

1. Accumulated Depreciation: Total depreciation expense accumulated over the life of an asset.

2. Asset Received But Not Billed: Assets received but not yet billed by the supplier.

3. Bank: Bank accounts where the company holds its funds.

4. Chargeable: Charges made to customers for services or products.

5. Capital Work In Progress: Costs associated with ongoing capital projects or investments.

6. Cost of Goods Sold: Direct costs associated with producing or acquiring goods for sale.

7. Current Asset: Assets expected to be converted into cash within one year (e.g., cash, accounts receivable, inventory).

8. Current Liability: Obligations due within one year (e.g., accounts payable, short-term loans).

9. Depreciation: Expense account to record the allocation of an asset's cost over its useful life.

10. Direct Expense: Costs directly related to the production or sale of goods or services.

11. Direct Income: Revenue generated directly from the sale of goods or services.

12. Equity: Owner's residual claim on the assets of the company.

13. Expense Account: Used to record various business expenses (e.g., salaries, rent, utilities).

14. Expenses Included In Asset Valuation: Expenses directly related to the valuation of assets.

15. Expenses Included In Valuation: Expenses used in asset valuation.

16. Fixed Asset: Long-term assets used in the production or operation of a business (e.g., property, plant, equipment).

17. Income Account: Used to record revenue earned by the business.

18. Indirect Expense: cost not directly related to the production or sale of goods and services(e.g., administrative expenses).

19. Indirect Income: Income not directly related to the primary operations of the business (e.g., interest income, rental income).

20. Liability: An obligation or debt that the company owes to others.

21. Payable: Amounts owed to others, such as accounts payable.

22. Receivable: Amounts owed to the company by customers or other entities, such as accounts receivable.

23. Round Off: Used to account for small differences due to rounding in financial transactions.

24. Round Off for Opening: For rounding differences related to the opening balances of accounts.

25. Stock: Used to track inventory levels of values and goods held for sale.

26. Stock Adjustments: Adjustments made for inventory levels , such as corrections for error and losses.

27.Stock Received But Not Billed: Inventory Received from supplier But yet not Billed.

28. Service Received But Not Billed: Service Received from vendor But yet not Billed.

29. Tax: Account for various taxes such as sales tax, income tax, and property tax.

30. Temporary: Accounts used for specific purposes or during a limited period.

Step 4: Adding New Accounts from the Chart of Accounts Tree

• You can directly access the Chart of Accounts from the Awesome Bar.

• A Chart of Accounts interface will open, and you need to select the required company from a dropdown menu

• After selecting the company, click on the + New button an interface will open consisting of Accounts details

• Fill in the following details:

Account Name: Enter a clear and descriptive name.

Account Type: Choose the appropriate type (e.g., Bank, Receivable, Payable).

Account Number: Mention the particular account number.

Parent Account Name: Mention under which the account lies such as the Fixed Asset Account lies under the Application of Funds(Asset) account , so Application of Funds(Asset) account is the Parent Account.

Company: Mention the Company name for which you are setting up the account.

Currency: If this account involves transactions in a specific currency, select it here.

Is Group: Check this box if this account will have sub-accounts under it.

Root Type: Select the root category for this account (e.g., Asset, Liability, Equity, Income, or Expense) to determine its position in the Chart of Accounts hierarchy.

Balance must be (Optional): If you're migrating from another accounting system, you can enter the opening balances for each account to reflect your starting financial position.

Rate: Mention the rate at which the tax is applicable.,

Disable Checkbox: Enable the checkbox when you want to disable a particular account.

• Then click on the Create New button.

Step 5: Create Account by Adding Child Account

●You can also create an account by selecting the parent account in the tree and clicking on the Add Child tab.

●On clicking the Add Child tab, the interface will appear identical to the one displayed in the previous image. Fill in the details and click on + New button.

Step 6: Editing an Account from the Chart of Accounts Tree

1. Locate the account you wish to edit in the Chart of Accounts tree.

2. Select the account name and click on the Edit option.

3. Open the details page.

4. Modify the following fields as needed:

Account Name: Update the account name.

Account Type: Change the account type (e.g., Bank, Receivable, Payable).

Currency: Modify the currency if required.

Is Group: Check or uncheck the box if you want to define this account as a group.

Root Type: Update the root category (Asset, Liability, Equity, Income, Expense) if necessary.

5. After making the required changes, click on the save to update the account.

6. You can also Delete the account by clicking on the Delete option right next to the Edit option.

Step 7: Viewing the Ledger from the Chart of Accounts

1. To view the ledger of any account, click on the account name in the Chart of Accounts tree.

2. The account details page will open.

3. On the Account detail page click on View Ledger button (usually located at the top-right of the page)

4. The Ledger page will display a list of all transactions recorded under that account, including transaction details such as dates, amounts, and references.

5. You can filter and sort the ledger by date, transaction type, company ,start date ,end date, cost center ,currency or other parameters to analyze the financial data effectively

Step 8: Additional Features of Chart of Account

● At the top right corner of the interface you will provide various different features and provides you to deep dive into the accounts and related accounting summary , lets understand them one by one:

● Collapse All: Collapsing all accounts and groups will help me navigate more easily by hiding the extended accounts and focusing on the main account.

● Expand All: Expanding all accounts and groups in the tree will provide you a comprehensive view of all the sub groups of accounts.

● View:

Chart of Cost Centers: View cost center details associated with the accounts,helping track costs from particular departments and units.

Opening Invoice Creation Tool: Helps to create the opening invoices when transferring from ERPNext to another System.

Period Closing Voucher: Allows you to create entries to close the Financial period.Ensuring proper accounting at the end of the financial period.

●  Create:

Journal Entry : Basically journal entries are created for the manual adjustments of financial statements.

Company: Create a company or unit to manage multiple organisations within ERPNext.

●  Financial Statements:

Generate Key financial statements such as Trial Balance,Balance sheet ,cash flow, Accounts payable, providing insights into your organization’s financial health.

Conclusion

The Chart of Accounts are important tool for financial growth with the features like account creation, ledger viewing, and tools for journal entries and financial statements, it helps streamline accounting and ensures accurate financial tracking for informed decision-making.