What is the Chart of Accounts?

A chart of account is a way to categorize your entries (posting of sales and purchase invoices). In order to prepare financial statements, it is necessary to group entries that are similar into one account.

For example, you can choose to create an account called "3000 - Rent Expenses" and post all your rent bills there. This way, you can easily see exactly how much money you spend each year on rent.

The more accounts you divide your entries into (up to a certain limit), the better overview you can get of how your income and expenses are distributed. The better overview you have of your finances, the better you understand your own business.

You may want to know, for example, how much money you spend on marketing in a year. So, you can choose to create an account called "3100 - Marketing Expenses" and post all receipts related to advertising to that account. But you can also take it a step further and subdivide the account "3100 - Facebook Ads" and create sub-accounts for it, such as "3110 - Newspaper Advertising", "3120 - Google Advertising", "3130 - TikTok Advertising", etc.

Then at the end of the year, you will be able to see, for example, that you have spent AED 30,000 on advertising, and it is distributed as AED 14,000 on Facebook advertising, AED 16,000 on website advertising, and AED 0 on TikTok Advertising.

It is important to understand that accounts are solely intended to categorize your receipts into small "categories" so that you always have a good overview of your cash flows. And an account in this context has nothing to do with your bank account.