The primary purpose of any accounting system is to make reporting easier. The proper set up of your chart of accounts is critical to achieving the goal of creating purposeful internal reports and external reports to outside funding sources.
All financial transactions must be categorized for a specific account, such as cash, receivable, payable, revenue or expense. The most effective method of categorizing your accounts is to use a numeric system. These numbers are referenced when generating all your reports including financial statements. When entering transactions, you will refer to a chart of accounts which will tell you what account number to use when you post an entry.