I have mentioned the importance of the chart of accounts. You may be wondering why I think that's so important.  Here is my reasoning:

 

1. The chart of accounts provides the chapters in our "book", the table of contents or trial balance is prepared from it. Again, it's a question of organization. The better organized, the easier to work with. An example of an account that we would use is acounts receivable. Now you may think that the one account would be sufficient for most businesses. But perhaps not. My business has two kinds of sales, one being normal merchandise and the other being large, one off items. So we may have two accounts: accounts reveivable-trade and accounts receivable-other. How might this happen? I run a repair shop for heavy equipment and I do general maintenance. But from time to time I sell engines or transmissions. It would be useful for me to segregate out customers who buy these items. The consequences of non-payment is higher given the large dollar amounts so I need the information separately from the smaller, day to day business of repairs. 

2. At the same time we can have too many accounts. The information becomes so granular as to be useless. I quite often see businesses with numerous revenue accounts. Some of the accounts have nominal balances and the information is of little value. So when we are developing the chart of accounts we need to be aware of too much information-accounts that summarize immaterial or insignificant amounts.