Chart of Accounts & Schedule III

Meera has now prepared vouchers, journals, ledgers, trial balances, and financial statements. She feels confident. Then one morning, Sharma Sir hands her the file of a new client — Bisht Traders, the wholesale spice business. Meera opens the file and her eyes widen. There are dozens of different accounts — CGST Input, SGST Output, Freight Outward, Godown Rent, Loading Charges, Trade Discount, Commission Paid, Commission Received... "How does anyone keep track of so many accounts?" she asks. Sharma Sir smiles. "With a Chart of Accounts. It is like a table of contents for all the accounts a business will ever use. Before you start any bookkeeping, you first create this chart. It is your map."

What is a Chart of Accounts?

Imagine you are building a new house. Before laying a single brick, you need a blueprint — a plan showing every room, every door, every window.

A Chart of Accounts (COA) is the blueprint of your accounting system. It is an organized, numbered list of every account the business will use.

Without a COA, things get messy fast. One person creates an account called "Electricity." Another creates "Electricity Expense." A third creates "Electric Bill Payment." Are these the same account or three different ones? Nobody knows. The books become confused.

With a COA, every account has:

• A unique number (like a roll number in school)
• A name (clear and standard)
• A group (which family it belongs to)

Sharma Sir explains:

"Think of it like the PIN code system. Every post office in India has a unique PIN code. 263601 is Almora. 263139 is Bageshwar. You do not confuse them because each has a number. Similarly, every account in your books gets a number. Account 4001 is Sales. Account 5001 is Purchases. No confusion."

The Five Main Groups

Every account in any business falls into one of five groups. Only five. No matter how big or small the business.

These five groups are the foundation. Everything else is a sub-group or a specific account within one of these five.

Let us explore each group with examples from Bisht Traders and Rawat Aunty's shop.

Group 1: Assets — What the Business Owns

Assets are things of value that the business owns or controls.

Sub-groups:

Fixed Assets (Non-Current Assets) — Things used in the business for a long time. They are not for sale.

• Land and Building
• Furniture and Fixtures
• Computers and Equipment
• Vehicles
• Godown (warehouse) structures

Current Assets — Things that change frequently, usually within a year.

• Cash in Hand
• Cash at Bank
• Stock (Inventory)
• Sundry Debtors (Accounts Receivable) — money customers owe
• Prepaid Expenses — bills paid in advance
• Advances to Suppliers — money paid to suppliers before receiving goods

Investments — Money put into fixed deposits, shares, etc.

Intangible Assets — Things of value that you cannot touch.

• Goodwill
• Trademarks
• Software licenses

For Rawat Aunty's small kirana shop, the main assets are: Cash, Bank Balance, Stock, Debtors, and Furniture.

For Bisht Traders (a bigger wholesale business), the list also includes: Godown, Vehicles, Computer Equipment, and Investments.

Group 2: Liabilities — What the Business Owes

Liabilities are debts and obligations — money the business must pay to others.

Sub-groups:

Non-Current Liabilities (Long-Term) — Debts due after more than one year.

• Bank Loans (term loans)
• Mortgages

Current Liabilities — Debts due within one year.

• Sundry Creditors (Accounts Payable) — money owed to suppliers
• Outstanding Expenses — bills received but not yet paid
• Short-term Loans
• GST Payable — GST collected that must be paid to the government
• TDS Payable — tax deducted that must be deposited

For Rawat Aunty: Sundry Creditors (Bisht Traders) and Outstanding Expenses.

For Bisht Traders: Bank Loan, Sundry Creditors, GST Payable, TDS Payable.

Group 3: Equity (Capital) — The Owner's Stake

Equity represents the owner's claim on the business after all liabilities are paid.

Sub-groups:

• Capital Account — the owner's investment
• Drawings Account — money the owner has taken out
• Reserves and Surplus — accumulated profits not withdrawn
• Current Year Profit/Loss — flows from the P&L Account

For a sole proprietorship like Rawat Aunty's shop, equity is simply Capital minus Drawings plus Profit.

For a company like a large version of Bisht Traders, equity includes Share Capital, Retained Earnings, and various Reserves.

Group 4: Income (Revenue) — Money Earned

Income is money the business earns through its operations and other sources.

Sub-groups:

Direct Income (Revenue from Operations):

• Sales of Goods
• Sales of Services

Indirect Income (Other Income):

• Interest Received (on bank deposits)
• Commission Received
• Rent Received (if the business sub-lets space)
• Discount Received (from suppliers for early payment)
• Profit on Sale of Asset

For Rawat Aunty: Sales is the main income. Interest on her bank deposit is other income.

For Bisht Traders: Sales of spices, Commission Received from other wholesalers, and Interest Received.

Group 5: Expenses — Money Spent

Expenses are costs incurred to run the business.

Sub-groups:

Direct Expenses (Cost of Goods Sold):

• Purchases of Goods
• Freight Inward / Carriage Inward
• Loading and Unloading Charges
• Customs Duty (for imported goods)
• Wages (of workers directly involved in production/handling)

Indirect Expenses (Operating Expenses):

• Salary (of office/admin staff)
• Rent
• Electricity
• Telephone and Internet
• Stationery and Printing
• Insurance
• Repair and Maintenance
• Depreciation
• Bank Charges
• Professional Fees (CA, lawyer)
• Travelling Expenses
• Miscellaneous Expenses

Tax Expenses:

• Income Tax (for the business, if applicable)

For Rawat Aunty: Purchases, Salary, Rent, Electricity are the main ones.

For Bisht Traders: All of the above, plus Godown Rent, Vehicle Expenses, Loading Charges, Commission Paid (to agents), and Travelling Expenses (sales staff visits clients in different cities).

Account Numbering System

Each account gets a unique number. The numbering follows a logical pattern so you can tell the group just by looking at the number.

Here is a common system:

When Meera sees account number 1201, she immediately knows it is an asset (1000 series) and a current asset (1200 sub-range). When she sees 5101, she knows it is an indirect expense.

Sharma Sir says:

"This numbering is not just for convenience. When you use accounting software, the software uses these numbers to automatically organize accounts into the right groups on the Balance Sheet and Profit & Loss Account. Get the numbering right, and the reports come out right."

Complete Chart of Accounts — Bisht Traders

Here is the full COA that Sharma Sir sets up for Bisht Traders, the wholesale spice business:

Assets (1000 - 1999)

Liabilities (2000 - 2999)

Equity (3000 - 3999)

Income (4000 - 4999)

Expenses (5000 - 5999)

That is over 60 accounts! Meera is a little overwhelmed. But Sharma Sir reassures her:

"You do not use all of them every day. Some accounts are used only once a year — like Depreciation or Bad Debts. But by having them all listed and numbered in advance, you never have to guess. When a new transaction happens, you look at the chart, find the right account, and use it."

Why GST Accounts Appear in the COA

Meera notices something new — accounts like "GST Input — CGST" and "GST Output — SGST."

Negi Bhaiya explains:

"Bisht Traders is GST-registered. When they buy goods, they pay GST to the supplier. That GST is recorded in the Input accounts (it is like money the government owes us back). When they sell goods, they collect GST from the customer. That GST is recorded in the Output accounts (it is money we owe to the government). At the end of the month, we calculate the difference — that is what Bisht Ji pays to the government."

We will cover GST in detail in Part 4 of this book. For now, just know that GST accounts are part of the Chart of Accounts.

Here is a simple summary:

Schedule III of the Companies Act, 2013

Sharma Sir now introduces a more formal concept.

"For Rawat Aunty's shop, which is a sole proprietorship, we can use any reasonable format for the Balance Sheet and P&L. But for a company — even a small private company — the government has prescribed a specific format. This format is in Schedule III of the Companies Act, 2013."

What is Schedule III?

Schedule III is a section of the Companies Act, 2013 that specifies exactly how a company must present its Balance Sheet and Statement of Profit and Loss. It tells you:

• What line items to show
• In what order
• How to group them
• What additional information (notes) to disclose

Even though Rawat Aunty and Bisht Traders may not be companies (they are sole proprietorships or partnerships), understanding Schedule III is important because:

1. Many employers will expect you to know this format.
2. If Bisht Traders ever becomes a company, this format will be required.
3. The chart of accounts should be designed so it can map to Schedule III easily.

Schedule III Balance Sheet Format (Simplified)

                    BALANCE SHEET
             as at 31st March 20XX

 ─────────────────────────────────────────────
 I. EQUITY AND LIABILITIES
 ─────────────────────────────────────────────

    1. Shareholders' Funds
       (a) Share Capital
       (b) Reserves and Surplus

    2. Non-Current Liabilities
       (a) Long-term Borrowings
       (b) Deferred Tax Liabilities
       (c) Other Long-term Liabilities
       (d) Long-term Provisions

    3. Current Liabilities
       (a) Short-term Borrowings
       (b) Trade Payables
       (c) Other Current Liabilities
       (d) Short-term Provisions

 ─────────────────────────────────────────────
 II. ASSETS
 ─────────────────────────────────────────────

    1. Non-Current Assets
       (a) Property, Plant and Equipment
       (b) Intangible Assets
       (c) Capital Work-in-Progress
       (d) Non-Current Investments
       (e) Deferred Tax Assets
       (f) Long-term Loans and Advances
       (g) Other Non-Current Assets

    2. Current Assets
       (a) Inventories
       (b) Trade Receivables
       (c) Cash and Cash Equivalents
       (d) Short-term Loans and Advances
       (e) Other Current Assets

 ─────────────────────────────────────────────

Notice some differences from the traditional format Meera used for Rawat Aunty:

• "Sundry Creditors" is now called "Trade Payables"
• "Sundry Debtors" is now called "Trade Receivables"
• "Furniture" falls under "Property, Plant and Equipment"
• "Stock" is now called "Inventories"
• "Cash at Bank" and "Cash in Hand" together are "Cash and Cash Equivalents"

The names are more formal, but the concepts are exactly the same.

Schedule III Profit & Loss Format (Simplified)

          STATEMENT OF PROFIT AND LOSS
        for the year ended 31st March 20XX

 ─────────────────────────────────────────────
 I.    Revenue from Operations        xx,xxx
 II.   Other Income                    x,xxx
 III.  Total Income (I + II)          xx,xxx

 IV.   Expenses:
       (a) Cost of Materials Consumed  xx,xxx
       (b) Purchases of Stock-in-Trade xx,xxx
       (c) Changes in Inventories       x,xxx
       (d) Employee Benefit Expense     x,xxx
       (e) Finance Costs                x,xxx
       (f) Depreciation and
           Amortisation Expense         x,xxx
       (g) Other Expenses               x,xxx
       Total Expenses                  xx,xxx

 V.    Profit Before Tax (III - IV)    x,xxx
 VI.   Tax Expense                     x,xxx
 VII.  Profit After Tax (V - VI)       x,xxx
 ─────────────────────────────────────────────

Mapping the COA to Financial Statements

Here is how the chart of accounts maps to the two main financial statements:

If the COA is set up correctly with proper grouping and numbering, the accounting software (or even a manual accountant) can automatically generate the Balance Sheet and P&L by sorting accounts into the right sections.

Tips for Creating a Good Chart of Accounts

Sharma Sir shares his experience:

1. Keep it simple to start. Do not create 100 accounts on Day 1. Start with 30-40 accounts. Add more as needed.

2. Be specific but not too specific. "Electricity" is good. "Electricity — Godown" and "Electricity — Office" is better for a larger business. But "Electricity — Light Bulb #3 in Back Room" is too much.

3. Use consistent naming. Decide a style and stick to it. If you write "Salary and Wages," do not also have an account called "Wages & Salary."

4. Number with gaps. Notice the numbering has gaps (1001, 1002... not 1, 2, 3...). This lets you insert new accounts later without renumbering everything. If you need an account between 1005 (Vehicle) and 1006 (Depreciation-Building), you can use 1005a or leave space in advance.

5. Separate GST accounts. For GST-registered businesses, always have separate accounts for CGST, SGST, and IGST — both input and output.

6. Match to the industry. A kirana shop has different accounts than a hotel or a factory. Customize the COA for the business.

Rawat Aunty vs. Bisht Traders — COA Comparison

Let us compare how a simple COA differs based on business size:

Meera sees the pattern. The bigger the business, the more detailed the COA. But the five main groups never change.

Meera Creates a COA for Rawat Aunty

As practice, Sharma Sir asks Meera to create a simple COA for Rawat General Store. Here is what she comes up with:

Sharma Sir reviews it. "Clean. Organized. Every account in its place. Well done, Meera. This is a solid chart of accounts for a small kirana shop."

Quick Recap

• A Chart of Accounts (COA) is a numbered, organized list of all accounts a business uses.
• Every account belongs to one of 5 groups: Assets, Liabilities, Equity, Income, Expenses.
• Assets = what the business owns (Fixed + Current).
• Liabilities = what the business owes (Long-term + Current).
• Equity = the owner's stake (Capital - Drawings + Profit).
• Income = money earned (Sales + Other Income).
• Expenses = money spent (Direct + Indirect).
• Account numbering follows a logical system: 1000s for Assets, 2000s for Liabilities, 3000s for Equity, 4000s for Income, 5000s for Expenses.
• Schedule III of the Companies Act, 2013 prescribes the format for Balance Sheet and P&L for companies.
• A good COA is simple, consistent, and customized for the business.
• GST-registered businesses need separate accounts for CGST, SGST, and IGST — both input and output.

Practice Exercise — Try This Yourself

Part A: Classify the Accounts

For each account below, identify which group it belongs to (Asset, Liability, Equity, Income, or Expense) and suggest a suitable account number using the numbering system described in this chapter.

Part B: Create a Chart of Accounts

Create a complete Chart of Accounts for a fictional business: "Kumaoni Handicrafts" — a small shop in Almora that sells handmade woolen shawls, wooden crafts, and local honey. The shop is GST-registered. The owner is Negi Ji. The shop has one employee. It has one bank account.

Include at least:

• 5 Asset accounts
• 3 Liability accounts
• 2 Equity accounts
• 3 Income accounts
• 8 Expense accounts

Number them properly using the system described in this chapter.

Fun Fact

The concept of a standardized chart of accounts goes back to the early 1900s in Europe. But India has had organized financial record-keeping for much longer. The Hundi system — used by Indian merchants for centuries — was an early form of organized accounting with specific categories for different types of transactions. When Bisht Ji's grandfather traded spices in the old mandis of Uttarakhand, he kept records in a bahi-khata (traditional account book) with categories remarkably similar to a modern chart of accounts. The names have changed. The software is new. But the idea of organizing money into categories? That is as old as trade itself.

This completes Part 2 — Bookkeeping by Hand. Meera now knows how to create vouchers, write journal entries, post to ledgers, prepare trial balances, build financial statements, and organize accounts. She can keep books for any small business using pen and paper. In Part 3, she will learn to do all of this on a computer using Udyamo ERPLite. The speed and power of software will amaze her — but only because she already understands what is happening behind the screen.