Your chart of accounts is the backbone of your bookkeeping system. Get it right from the start and every transaction will have a clear, logical home. Get it wrong and you'll spend months untangling a mess. Here's how to do it right.
What is a chart of accounts?
A chart of accounts (COA) is an organized list of every financial account in your business. Every transaction you record gets assigned to one of these accounts.
Think of it as a filing system. When you spend money on office supplies, it goes into the Office Supplies expense account. When a client pays an invoice, it goes into your Accounts Receivable or directly to your bank account.
Most accounting software comes with a default chart of accounts. You can customize it — adding accounts specific to your business and removing ones you'll never use.
The 5 account types
Every account in your chart of accounts falls into one of five categories:
Assets (1000-1999): Things your business owns or is owed. Bank accounts, accounts receivable, equipment, and inventory are all assets.
Liabilities (2000-2999): Things your business owes. Credit card balances, loans, accounts payable, and deferred revenue are liabilities.
Equity (3000-3999): The owner's stake in the business. Includes owner's capital, retained earnings, and owner draws.
Revenue (4000-4999): Money your business earns. Sales, service income, and consulting fees are revenue accounts.
Expenses (5000-9999): Money your business spends. Rent, payroll, software, marketing, and supplies are expense accounts.
Numbering your accounts
Account numbers make your chart of accounts easier to navigate. The standard convention uses number ranges to identify account types:
- 1000s — Assets
- 2000s — Liabilities
- 3000s — Equity
- 4000s — Revenue
- 5000-9999 — Expenses
Within each range, you can get specific. For example: 1010 — Business Checking, 1020 — Business Savings, 1100 — Accounts Receivable, 1200 — Inventory.
Common accounts every small business needs
Start with these accounts and add more as needed:
Assets:
- 1010 Business Checking
- 1020 Business Savings
- 1100 Accounts Receivable
- 1200 Prepaid Expenses
Liabilities:
- 2010 Accounts Payable
- 2020 Credit Card Payable
- 2100 Sales Tax Payable
Equity:
- 3010 Owner's Capital
- 3020 Owner's Draw
- 3900 Retained Earnings
Revenue:
- 4010 Sales / Service Revenue
Expenses:
- 5010 Advertising & Marketing
- 5020 Bank Fees
- 5030 Insurance
- 5040 Meals & Entertainment
- 5050 Office Supplies
- 5060 Professional Services
- 5070 Rent
- 5080 Software & Subscriptions
- 5090 Travel
- 5100 Utilities
Accounts to add as you grow
As your business gets more complex, you may need to add more specific accounts:
- Payroll expenses (if you hire employees)
- Depreciation (if you own equipment or vehicles)
- Inventory (if you sell physical products)
- Cost of goods sold (COGS)
- Multiple revenue streams (Service Revenue, Product Revenue, Consulting Revenue)
- Subcontractor expenses
Keep your COA as simple as possible. It's easier to add accounts than to merge messy ones later.
Common mistakes to avoid
Too many accounts: You don't need 200 expense categories. More accounts means more complexity and more opportunities for miscategorization. Start simple.
Using one catch-all account: "Miscellaneous" or "General" expense accounts are a red flag for accountants. Everything should have a clear home.
Mixing personal and business: Never use a personal account for business transactions or vice versa. This is the fastest way to create bookkeeping chaos.
Inconsistent categorization: If you categorize Zoom as "Software" in January and "Communications" in March, your reports become unreliable. Be consistent every time.