Your Profit and Loss statement shows a healthy profit, but your bank account tells a completely different story. Sound familiar?
This frustrating disconnect often stems from one overlooked culprit: your chart of accounts.
In this guide, you’ll learn exactly how to set up a chart of accounts that gives you clarity instead of confusion, with industry-specific examples, software setup tips, and free templates you can use today.
According to SCORE, 40% of small business owners feel they aren’t knowledgeable about their own accounting, and a poorly structured chart of accounts is usually where the confusion starts.
We’ve cleaned up hundreds of messy books, and we’ll show you exactly how to build a financial foundation that actually works.
Key Takeaways
- What a chart of accounts is and why it’s the backbone of your financial reporting
- The 5 account types every business needs and how they connect to your financial statements
- How to set up your chart of accounts in QuickBooks, Xero, NetSuite, and Odoo
- Common chart of accounts mistakes that cost small businesses money (and how to fix them)
- Free industry-specific templates you can download and use immediately
What Is a Chart of Accounts and Why Does It Matter?
A chart of accounts is a complete list of every account in your business’s general ledger, organized by category. It determines how transactions are recorded and how your financial statements are generated, making it the foundation of your entire accounting system.
Think of your chart of accounts as the filing system for every dollar that moves through your business. When you pay rent, buy inventory, or collect payment from a customer, each transaction needs a designated “home.” Without a proper filing system, you’re left guessing where your money went.
How Does a Chart of Accounts Work?
Your chart of accounts connects directly to your general ledger, which then feeds into your Balance Sheet and Income Statement. Every account in your chart of accounts represents a specific category of transaction, cash, accounts receivable, sales revenue, rent expense, and so on.
Here’s a simple way to think about it: when you log into your personal bank account, you see checking, savings, and credit card balances. Your business chart of accounts works the same way, just with more categories customised to business operations.
Why is your chart of accounts important?
If your chart of accounts doesn’t track something, you can’t report on it. Period.
Want to know your profit margin by product line? Your chart of accounts needs separate revenue and cost accounts for each line. Need to track marketing spend by channel? You’ll need individual expense accounts for each. The structure you build today determines what questions your financial reports can answer tomorrow.
Key Points:
- Every transaction needs a “home” in your chart of accounts
- Your chart of accounts structure directly limits (or enables) your reporting capabilities
- A well-designed chart of accounts tells the story of how your business makes and spends money
What Are the 5 Main Types of Accounts in a Chart of Accounts?
In accounting, there are five main account types: assets, liabilities, equity, revenue, and expenses. Assets refer to what you own, while liabilities indicate what you owe. Equity represents the owner’s stake in the business.
Revenue is the money earned from operations, and expenses are the money spent to run the business. Assets, liabilities, and equity are presented on the Balance Sheet, whereas revenue and expenses are reported on the Income Statement.
Now that you understand what a chart of accounts does, let’s look at what goes inside it. Every chart of accounts, whether for a solo freelancer or a multi-million dollar company, organizes transactions into five main categories.
Balance Sheet Accounts
These three account types capture your business’s financial position at a specific point in time:
- Assets include everything your business owns that has value: Cash and bank accounts, Accounts receivable (money customers owe you), Inventory, Equipment and vehicles, Prepaid expenses.
- Liabilities represent what your business owes: Accounts payable (bills you owe suppliers), Credit card balances, Loans and notes payable, and deferred revenue (money received for services not yet delivered). Many finance teams are now streamlining their accounts payable processes with ai in accounts payable solutions that automate invoice processing and payment workflows.
- Equity shows the owner’s stake in the business: owner’s equity (capital contributions), retained earnings, and Common stock (for corporations).
Income Statement Accounts
These two account types track financial performance over a period of time:
- Revenue captures all income your business earns: Sales revenue, Service income, Interest income, Other income.
- Expenses record the costs of running your business: Cost of goods sold (COGS), Payroll and benefits, Rent and utilities, Marketing and advertising, and Professional fees.
How Do You Set Up a Chart of Accounts Numbering System?
A standard chart of accounts numbering system assigns number ranges to each account type: Assets (1000–1999), Liabilities (2000–2999), Equity (3000–3999), Revenue (4000–4999), and Expenses (5000–5999). This structure makes accounts easy to identify, sort, and organize.
You’ve got your five account categories. Now you need a system to keep everything organized as your business grows. That’s where account numbering comes in.
Standard Numbering Convention
Most accounting software and CPAs follow this standard structure:
| Account Type | Number Range | Example |
|---|---|---|
| Assets | 1000–1999 | 1010 Cash – Checking |
| Liabilities | 2000–2999 | 2010 Accounts Payable |
| Equity | 3000–3999 | 3010 Owner's Equity |
| Revenue | 4000–4999 | 4010 Product Sales |
| Expenses | 5000–5999 | 5010 Cost of Goods Sold |
The first digit instantly tells you the account type. The remaining digits identify the specific account within that category.
Why Numbering Matters
A proper numbering system does three things:
- Leaves room to grow. Use gaps between numbers (1010, 1020, 1030) so you can add accounts later without restructuring everything.
- Makes reports easier to read. Accounts are sorted numerically, keeping similar items grouped together.
- Enables software imports. Most accounting software requires account numbers to import the chart of accounts templates.
What Does a Small Business Chart of Accounts Look Like?
A small business chart of accounts typically includes 20–50 accounts covering cash, receivables, payables, equity, sales revenue, cost of goods sold, and operating expenses. The exact accounts depend on your industry, business model, and what you need to track for decision-making.
Theory is helpful, but examples make everything click. Let’s look at the actual chart of accounts structures for different business types.
Sample Chart of Accounts for a Service Business
A consulting firm or professional services company might use this structure:
- Assets (1000s): Cash – Checking, Cash – Savings, Accounts Receivable, Prepaid Expenses, Office Equipment
- Liabilities (2000s): Accounts Payable, Credit Card Payable, Payroll Liabilities, Deferred Revenue
- Equity (3000s): Owner’s Equity, Retained Earnings, Owner’s Draws
- Revenue (4000s): Consulting Revenue, Training Revenue, Other Income
- Expenses (5000s): Salaries & Wages, Contractor Payments, Rent, Utilities, Software Subscriptions, Professional Development, Marketing
Sample Chart of Accounts for E-commerce
An e-commerce business needs accounts that capture inventory movement and multi-channel selling:
- Additional Assets: Inventory, Merchant Account Receivables
- Revenue Accounts: Product Sales – Website, Product Sales – Amazon, Product Sales – Wholesale, Shipping Revenue
- COGS Accounts: Product Costs, Inbound Freight, Amazon FBA Fees, Payment Processing Fees
- Operating Expenses: Shipping & Fulfillment, Marketplace Fees, Packaging Materials, Returns & Refunds
This chart of accounts for e-commerce separates revenue and costs by channel so you can see true profitability for each sales platform.
What are the Best Practices for the Chart of Accounts for Small Businesses?
The best chart of accounts practices include: keeping it simple (25–50 accounts for most small businesses), matching accounts to your business model, leaving room for growth in your numbering system, and reviewing annually to remove unused accounts.
A well-structured chart of accounts isn’t just about following rules; it’s about building a system that helps you make better decisions. Here’s how to create a chart of accounts that works.
1. Keep It Simple—But Not Too Simple
There’s a sweet spot between too few and too many accounts. Too few (under 15 accounts) means you can’t analyze where money goes. Everything lumps together into useless categories.
Too many (100+ accounts) make categorizing transactions confusing. Staff create new accounts instead of finding existing ones. Just right (25–50 accounts) gives you enough detail to answer important questions without creating classification paralysis.
2. Align Your chart of accounts to How You Actually Run Your Business
Your CPA might set up your chart of accounts for tax filing convenience, but you have to live with it 365 days a year. Track what matters for decisions, not just compliance. If you need to know marketing ROI by channel, create separate accounts for each channel.
Match revenue accounts to product/service lines. This enables margin analysis by offering. Separate COGS from operating expenses. Mixing them destroys your ability to calculate gross profit.
3. Review and Clean Up Annually
Schedule an annual chart of accounts review to: Merge rarely-used accounts, Archive inactive accounts, Ensure naming consistency, and Verify accounts still match business operations.
Pro Tip: Your CPA sets up your chart of accounts for taxes, but it should also meet your daily reporting needs.
What Are the Most Common Chart of Accounts Mistakes?
The most common chart of accounts mistakes are: using generic software defaults, creating too many or too few accounts, inconsistent naming conventions, misclassifying transactions, and failing to review or clean up the chart of accounts. These mistakes lead to unreliable financial reports and poor decision-making.
We’ve cleaned up hundreds of messy books over the years. The same mistakes keep showing up. Here’s what to avoid.
Mistake 1: Using the Default Template Without Customization
The Problem: Generic templates don’t match your business model. A software company using a retail template will have accounts for inventory they don’t need and miss accounts for subscription revenue they do need.
The Fix: Customize your chart of accounts within the first 30 days of setup.
Mistake 2: Inconsistent Account Naming
The Problem: “Office Supplies” vs. “Supplies – Office” vs. “Office Expense” all mean the same thing, but create three separate accounts. Now expenses are scattered across multiple places.
The Fix: Establish a naming convention and stick to it.
Mistake 3: Creating Duplicate Accounts
The Problem: Someone can’t find the right account, so they create a new one. Now you have “Marketing,” “Marketing Expense,” and “Advertising & Marketing” all tracking similar costs.
The Fix: Regular chart-of-accounts audits. At year-end, merge duplicates using journal entries.
Mistake 4: Not Separating Revenue by Product/Service Line
The Problem: All revenue dumps into one “Sales” account. You know total revenue but have no idea which offerings are profitable.
The Fix: Create matching Revenue and COGS accounts for each major product or service line.
Mistake 5: Never Reviewing or Cleaning Up
The Problem: Over the years, the chart of accounts accumulates unused accounts, outdated categories, and inconsistent naming. Reports become cluttered and confusing.
The Fix: Schedule an annual review. Archive inactive accounts, merge duplicates, and verify the structure still matches how you operate.
Mistake 5: Never Reviewing or Cleaning Up
The Problem: Over the years, the chart of accounts accumulates unused accounts, outdated categories, and inconsistent naming. Reports become cluttered and confusing.
The Fix: Schedule an annual review. Archive inactive accounts, merge duplicates, and verify the structure still matches how you operate.
How Do You Clean Up or Migrate a Chart of Accounts?
To clean up your chart of accounts, start by exporting your current chart. Next, identify any duplicate, unused, or misnamed accounts. Create a mapping document to consolidate these accounts, then make journal entries to transfer the balances to the appropriate accounts. Finally, archive or delete old accounts only at the end of the year.
Sometimes the best path forward is to fix what you have or start fresh with a new system. Here’s how to approach both scenarios.
When to Clean Up vs. Start Fresh
Clean up your existing chart of accounts when: You have minor inconsistencies or naming issues, A few duplicate accounts need merging, or the overall structure is sound but needs refinement.
Start fresh when: Major structural problems exist (wrong account types, missing categories), you’re migrating to a new ERP system, or your business model has fundamentally changed.
Cleaning up a messy chart of accounts doesn’t have to be overwhelming. Follow these six steps in order to get your COA back on track without corrupting your historical data.
Step-by-Step Chart of Accounts Cleanup Process
Step 1: Export Your Current Chart of Accounts to a Spreadsheet
Start by pulling your entire COA into Excel or Google Sheets. Include four key data points for each account: account number, account name, account type (asset, liability, equity, revenue, expense), and current balance. This gives you a working document you can mark up without touching your live accounting system.
Step 2: Flag Accounts with Zero Activity
Review each account’s transaction history. Any account with zero activity for 12 months or longer is a candidate for removal. Mark these in your spreadsheet with a “flag for review” notation. Don’t delete yet—just identify them.
Step 3: Identify Duplicates and Similar Accounts
Look for accounts that track the same thing under different names. Common culprits include:
- “Office Supplies” vs. “Supplies – Office” vs. “Office Expense”
- “Marketing” vs. “Marketing Expense” vs. “Advertising & Marketing”
- “Professional Fees” vs. “Consulting Fees” vs. “Outside Services”
Highlight the duplicates in your spreadsheet and group them.
Step 4: Create a Mapping Document
For every account you plan to merge, rename, or eliminate, document the change clearly:
- 5210 Office Supplies → Merge into → 5200 Office Expense
- 5215 Supplies – Office → Merge into → 5200 Office Expense
- 6100 Marketing → Keep & Rename → 6100 Marketing & Advertising
- 6150 Advertising & Marketing → Merge into → 6100 Marketing & Advertising
This mapping document becomes your reference guide for the next step and your audit trail for future questions.
Step 5: Run Journal Entries to Transfer Balances
Now execute the cleanup in your accounting software. For each account being eliminated:
- Create a journal entry debiting the old account (zeroing it out)
- Credit the new destination account with the same amount
- Add a memo noting “COA cleanup – merged from [old account name]”
This moves all historical balances to the correct accounts while maintaining your audit trail.
Step 6: Archive Old Accounts at Year-End
Here’s the critical rule: never delete accounts mid-year. Doing so corrupts your historical reports and makes year-over-year comparisons impossible.
Instead:
- Wait until after the year-end close
- Mark accounts as “inactive” or “archived” in your software
- Only delete accounts that have had zero balance and zero activity for a full fiscal year
Pro Tip: Schedule your COA cleanup in January after year-end for a fresh start without disrupting reporting.
Conclusion
Your chart of accounts is more than an accounting requirement; it’s the foundation that determines whether your financial reports help you make decisions or just collect dust.
We’ve covered a lot of ground: the five account types, numbering systems, industry-specific examples, software setup, best practices, common mistakes, and cleanup processes. It might feel overwhelming, but here’s the good news: you don’t have to figure it out alone.
Ready to build a chart of accounts that actually works for your business?
Schedule a free consultation with our accounting team to review your current setup.
FAQs
Q: What is the difference between a chart of accounts and a general ledger?
A chart of accounts is the list of all account names and numbers available for recording transactions—think of it as the filing cabinet labels. The general ledger is the actual record of all transactions posted to those accounts—the contents inside each folder. The chart of accounts defines the structure; the GL contains the data.
Q: How many accounts should a small business have in its chart of accounts?
Most small businesses need 25–50 accounts. Having too few (under 15) limits your ability to analyze spending patterns. Having too many (100+) makes categorization confusing and time-consuming. The right number depends on your industry and what decisions you need your financial reports to support.
Q: Can I change my chart of accounts after I've started using it?
Yes, but carefully. You can add new accounts anytime. However, you should only delete, merge, or rename accounts at year-end to avoid corrupting your historical data. If you need to move transactions to a new account, use journal entries rather than editing historical transactions directly.
Q: What is a standard chart of accounts?
A standard chart of accounts follows the five-category structure (Assets, Liabilities, Equity, Revenue, Expenses) with a consistent numbering system. While there’s no universal standard in the U.S.—unlike France or Germany, where national standards exist—most accounting software uses similar default templates based on generally accepted accounting principles (GAAP).
Q: How do I know if my chart of accounts is set up correctly?
Your chart of accounts is set up correctly if: (1) Your financial statements are easy to read and understand, (2) You can quickly find where any transaction should be recorded, (3) You can run reports that answer your specific business questions, and (4) You’re not constantly creating new accounts or miscategorizing transactions.
