Your chart of accounts (COA) is the backbone of your bookkeeping system. Set it up wrong and you'll have messy financial statements, complicated tax preparation, and difficulty analyzing your business. Set it up right and bookkeeping becomes straightforward, reports are meaningful, and tax time is painless. Here's how to create a chart of accounts that works.
What Is a Chart of Accounts?
Your chart of accounts is a complete listing of all accounts in your general ledger, organized by category. Think of it as the filing system for every financial transaction your business makes.
The Five Main Account Types:
1. Assets: What your business owns (cash, equipment, receivables) 2. Liabilities: What your business owes (loans, payables, credit cards) 3. Equity: Owner's stake in the business 4. Revenue: Money coming in from sales and services 5. Expenses: Money going out to run the business
Every transaction you record goes into one or more of these account types.
Chart of Accounts Structure
Most businesses use numbered accounts:
Account Numbering System: • 1000-1999: Assets • 2000-2999: Liabilities • 3000-3999: Equity • 4000-4999: Revenue/Income • 5000-5999: Cost of Goods Sold • 6000-7999: Operating Expenses • 8000-8999: Other Income • 9000-9999: Other Expenses
Leave gaps between numbers (1000, 1100, 1200) so you can add accounts later without renumbering everything.
Sample Chart of Accounts for Small Business
Assets (1000-1999):
1000 - Checking Account 1010 - Savings Account 1020 - Petty Cash 1200 - Accounts Receivable 1300 - Inventory 1400 - Prepaid Insurance 1410 - Prepaid Rent 1500 - Equipment 1510 - Accumulated Depreciation - Equipment 1600 - Vehicles 1610 - Accumulated Depreciation - Vehicles
Liabilities (2000-2999):
2000 - Accounts Payable 2100 - Credit Card - Visa 2110 - Credit Card - AmEx 2200 - Sales Tax Payable 2300 - Payroll Taxes Payable 2400 - Line of Credit 2500 - Equipment Loan 2600 - Vehicle Loan 2700 - Long-Term Debt
Equity (3000-3999):
3000 - Owner's Investment 3100 - Owner's Draws 3900 - Retained Earnings 3920 - Current Year Earnings
Revenue (4000-4999):
4000 - Service Revenue 4010 - Product Sales 4020 - Consulting Revenue 4100 - Shipping Revenue 4900 - Returns and Allowances (contra-revenue)
Cost of Goods Sold (5000-5999):
5000 - Purchases - Materials 5100 - Direct Labor 5200 - Subcontractors 5300 - Shipping Costs 5400 - Payment Processing Fees
Operating Expenses (6000-7999):
Administrative: 6000 - Salaries - Administrative 6010 - Payroll Taxes 6020 - Employee Benefits 6100 - Rent 6200 - Utilities 6210 - Phone and Internet 6300 - Office Supplies 6400 - Software and Subscriptions 6500 - Insurance - General Liability 6510 - Insurance - Workers Comp
Marketing and Sales: 6600 - Advertising 6610 - Website Costs 6620 - Social Media Marketing 6630 - Networking Events
Professional Services: 6700 - Accounting and Bookkeeping 6710 - Legal Fees 6720 - Consulting
Facilities and Equipment: 6800 - Repairs and Maintenance 6810 - Equipment Rental 6820 - Depreciation Expense
Vehicle Expenses: 6900 - Vehicle Gas and Oil 6910 - Vehicle Repairs 6920 - Vehicle Insurance
Other Operating Expenses: 7000 - Bank Fees 7010 - Credit Card Processing Fees (if not COGS) 7100 - Licenses and Permits 7200 - Training and Education 7300 - Meals and Entertainment 7400 - Travel 7500 - Dues and Subscriptions 7600 - Bad Debt Expense 7900 - Miscellaneous Expense
Other Income/Expense (8000-9999):
8000 - Interest Income 8100 - Other Income 9000 - Interest Expense 9100 - Other Expenses
Customizing for Your Industry
Retail Business: Add accounts for: • Inventory by category • Returns and allowances • POS system fees • Merchant services fees • Shrinkage/theft • Store displays and fixtures
Restaurant: Add accounts for: • Food purchases • Beverage purchases • Kitchen supplies • Uniforms and linens • Menu printing • Music licensing
Professional Services: Add accounts for: • Billable labor by type • Project costs • Professional liability insurance • Continuing education • License renewals
Construction: Add accounts for: • Job costs by project • Materials by category • Equipment rental • Permits and inspections • Warranty reserves • Job site expenses
E-commerce: Add accounts for: • Platform fees (Shopify, Etsy, Amazon) • Payment processing by platform • Shipping and fulfillment • Returns processing • Inventory storage • Product photography
Best Practices for Chart of Accounts
1. Keep It Simple • Start with fewer accounts, add as needed • Don't create accounts you'll rarely use • Combine similar expenses • Aim for 50-100 accounts total for most small businesses
2. Use Clear, Descriptive Names Good: "Software Subscriptions" Bad: "Subscriptions" (subscriptions to what?)
Good: "Credit Card - Chase Visa" Bad: "CC1" (which card?)
3. Group Related Accounts Together Use numbering to group: • 6600-6699: All marketing expenses • 6700-6799: All professional services • 6800-6899: All facility costs
4. Separate Personal from Business Never combine: • Personal and business credit cards in one account • Personal and business bank accounts • Personal and business vehicles
5. Match Your Tax Return Categories Align expense accounts with: • Schedule C categories (sole proprietors) • Form 1120S categories (S-Corps) • State sales tax categories
This makes tax preparation infinitely easier.
6. Track What You Need to Manage Create separate accounts for expenses you want to: • Monitor closely • Budget separately • Compare to industry benchmarks • Analyze for cost reduction
7. Use Sub-Accounts Sparingly Sub-accounts create hierarchy: • Travel (parent) - Airfare (sub) - Hotels (sub) - Meals (sub) - Car Rental (sub)
Use only when you need detailed breakouts. Too many sub-accounts complicates reports.
8. Create Accounts for Common Recurring Expenses Don't lump everything into "Miscellaneous." If it happens monthly, it deserves its own account.
Common Mistakes to Avoid
1. Too Many Accounts 150+ accounts for a $500K business is overkill. Creates: • Analysis paralysis • Inconsistent categorization • Complicated reports • Extra work for no benefit
2. Too Few Accounts "Office Expenses" containing rent, utilities, supplies, software, and insurance is too broad. You can't analyze what you can't see.
3. Using "Miscellaneous" for Everything If more than 5% of expenses go to "Miscellaneous," you need more specific accounts.
4. Creating Accounts for Rare Expenses Don't create "Snow Removal" if you spent $150 once. Use "Repairs and Maintenance."
5. Mixing COGS with Operating Expenses This destroys gross profit calculations. Keep them completely separate.
6. Not Using Account Numbers Named accounts without numbers: • Sort alphabetically, not logically • Create organizational chaos • Make financial statements hard to read
7. Personal Expenses in Business COA Creates tax problems and messy books. Record as owner's draw/distribution instead.
Special Considerations
Multi-Location Businesses: Two approaches:
A) Use class tracking: • Single COA • Assign each location a class • Report by location
B) Separate entities: • Each location has own books • Consolidate for overall view • More complex but cleaner
Multiple Revenue Streams: Create separate income accounts: • Product Line A • Product Line B • Services • Consulting
This shows which streams are most profitable.
Project-Based Businesses: Use QuickBooks Projects or Jobs feature: • Track income and expenses by project • COA stays clean • Get profitability by project
Don't create COA accounts for each project - use project tracking instead.
Sales Tax: Create separate account for each jurisdiction: • Sales Tax - Minnesota State • Sales Tax - Hennepin County • Sales Tax - City of Minneapolis
Or use one account if you only have one rate.
Modifying Your Chart of Accounts
You can always adjust:
Adding Accounts: • Add anytime • Use next available number in sequence • Be specific about what belongs
Merging Accounts: • Combine overly specific accounts • Reclassify all historical transactions • Update any recurring entries
Deleting Accounts: • You can't delete accounts with transactions • Make inactive instead • Consider merging with similar account
Renaming Accounts: • Rename anytime for clarity • Doesn't affect historical data • Update any memorized transactions
Annual COA Review: Every December: • Review account usage • Merge underused accounts • Add accounts for new expense types • Clean up descriptions • Ensure alignment with tax categories
Getting Help
If your COA is a mess: • Don't try to fix it mid-year • Work with a bookkeeper to plan changes • Implement at start of new year • May need to reclassify previous transactions
Professional bookkeepers can: • Design COA for your industry • Set up in QuickBooks • Train you on proper categorization • Clean up existing mess
A well-designed chart of accounts makes bookkeeping easier, reports more useful, and tax preparation simpler. Invest time getting it right from the start - or hire a professional to do it correctly. Your future self will thank you.