What is a chart of accounts?
A chart of accounts is the master list of categories your bookkeeping uses to record money. Every sale, bill, payment and transfer is placed into one of these accounts. The list decides what your reports show. A good chart makes the numbers easy to read. A messy one hides problems.
Think of it as the filing system for your finances. A shoebox of receipts has no order. A chart of accounts gives each receipt a home. For a plain definition, see the glossary entry on chart of accounts.
Your chart feeds two main reports. The profit and loss statement shows income and expenses over a period. The balance sheet shows what you own and owe on a date. Both reports are only as clear as the accounts behind them.
What are the five types of accounts?
Every account belongs to one of five types: assets, liabilities, equity, income or expenses. Assets and expenses show what you have and what you spend. Liabilities and equity show what you owe and what the owners hold. Income shows what you earn.
| Type | What it holds | Examples | Report |
|---|---|---|---|
| Assets | What the business owns | Checking, savings, accounts receivable, equipment | Balance sheet |
| Liabilities | What the business owes | Credit cards, accounts payable, loans, sales tax payable | Balance sheet |
| Equity | The owner’s stake | Owner investment, owner draws, retained earnings | Balance sheet |
| Income | Money earned | Service revenue, product sales, interest income | Profit and loss |
| Expenses | Money spent to run the business | Rent, software, payroll, advertising | Profit and loss |
The first three types describe the business at one moment. The last two describe activity over a period. That split is why a transaction usually touches one account from each side of the books.
What does an example chart of accounts look like?
A small service business can run on a short chart. The example below uses a common numbering habit: 1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for income and 5000s to 6000s for expenses. Use it as a starting point, not a rule.
| Number | Account | Type |
|---|---|---|
| 1000 | Business Checking | Asset |
| 1010 | Business Savings | Asset |
| 1100 | Accounts Receivable | Asset |
| 1500 | Equipment | Asset |
| 2000 | Accounts Payable | Liability |
| 2100 | Business Credit Card | Liability |
| 2200 | Sales Tax Payable | Liability |
| 2500 | Loan Payable | Liability |
| 3000 | Owner Investment | Equity |
| 3100 | Owner Draws | Equity |
| 3900 | Retained Earnings | Equity |
| 4000 | Service Revenue | Income |
| 4100 | Product Sales | Income |
| 4900 | Other Income | Income |
| 5000 | Contractor Payments | Expense |
| 5100 | Cost of Goods Sold | Expense |
| 6000 | Advertising and Marketing | Expense |
| 6100 | Software and Subscriptions | Expense |
| 6200 | Office Supplies | Expense |
| 6300 | Rent | Expense |
| 6400 | Utilities and Phone | Expense |
| 6500 | Insurance | Expense |
| 6600 | Professional Fees | Expense |
| 6700 | Bank and Merchant Fees | Expense |
| 6800 | Travel and Meals | Expense |
| 6900 | Payroll and Payroll Taxes | Expense |
Your own chart will differ. A store needs inventory and cost of goods sold. A firm with staff needs payroll accounts. A nonprofit uses funds and classes. Keep the shape, then fit the names to your business and your CPA’s needs.
How do I set up a chart of accounts step by step?
Start from the reports you want, then work backward to the accounts. Keep the list short, name accounts in plain words, and review it with your CPA once.
- List the reports you read. Decide what you want to see, such as profit by service line or spend by vendor type.
- Ask your CPA what the return needs. Note any expense lines they want kept apart, such as meals or contractor payments.
- Start with a template. Use your accounting software’s default chart, or the example above, and delete what you will not use.
- Add accounts only for real decisions. Create a separate account when you would act on the number. If you never would, group it.
- Name accounts in plain words. Use “Software and Subscriptions”, not “Misc 2”. Everyone on your team should know where a charge goes.
- Number the accounts. Numbers keep reports in a steady order and make sorting easy.
- Write the rules down. Create a one-page coding guide. For example: “Zoom and Slack go to Software and Subscriptions.”
- Test with a month of data. Code a month of transactions and read the reports. Fix anything that looks odd.
- Review each quarter. Add, rename or retire accounts as the business changes.
If your books are already in use, you will clean up rather than start fresh. That is common after a stretch of catch-up bookkeeping.
What are the most common chart of accounts mistakes?
Most mistakes come from too many accounts, vague names, or mixing personal and business items. These errors make reports unreliable and slow down tax prep. Each one has a simple fix, and most take a few minutes to correct once you spot them.
| Mistake | Why it hurts | Fix |
|---|---|---|
| Dozens of near-duplicate accounts | Spend splits across “Supplies”, “Office Stuff” and “Misc” | Merge into one clear account |
| A big “Miscellaneous” or “Ask My Accountant” account | Hides real costs and delays tax prep | Clear it monthly and code each item |
| Mixing personal and business spending | Distorts profit and risks errors on the return | Use a separate account and card; record owner draws |
| Using Expenses for loan principal | Overstates costs and understates debt | Record principal against the loan liability |
| Vague names | Different people code the same item differently | Rename and add a coding guide |
| Never reviewing the chart | Old accounts pile up | Review each quarter |
| Changing accounts mid-year without a plan | Makes year-over-year comparison hard | Change at month end and note the date |
Many of these show up in our post on bookkeeping blunders. A clean chart is also part of a good month-end close, because the close checks that every item sits in the right account.
How does the chart connect to your tax prep?
Your chart of accounts feeds your financial statements, and those statements feed your tax return. When each expense account maps cleanly to a tax line, your CPA spends less time sorting and asking questions. That saves hours at filing time.
Your CPA owns the tax advice. Your bookkeeper owns the coding. The two need to agree on a few points up front:
- Which expense categories your return needs shown separately
- How to treat owner pay, draws and loans
- Which method applies, cash or accrual, see our guide on cash vs accrual accounting
- How to handle contractor payments that may need a 1099, which is the reason to keep them in their own account
Do not guess on any tax treatment. This guide is general education, and your CPA should confirm the setup for your case. For a view on tax-season prep, see how a bookkeeper can save time during tax season.
Who should maintain the chart of accounts?
One person should own it. That person approves new accounts and keeps the coding guide current. For most small businesses, this is the bookkeeper. The owner and the CPA give input, but they do not each add accounts on their own.
Shared editing creates duplicates fast. One person adds “Ads”, another adds “Advertising”, and soon reports split. A single owner avoids this. If you have no bookkeeper, assign the job to one team member and write down the rule.
Peachtree bookkeepers mainly work in QuickBooks Online. The Peachtree bookkeeping service includes transaction management, account reconciliation, monthly financial reports and CPA coordination. Ask about your chart of accounts in the consultation.
Bookkeeping packages start as little as $240 per month. They are based on transaction volume and complexity. A free 30-minute consultation shows what your setup needs. Learn more about bookkeeping as a function.
How do sub-accounts and classes keep the chart short?
Sub-accounts and tags let you add detail without adding clutter. A sub-account nests under a parent, such as “Software and Subscriptions” with a child for “Project Tools”. A class or tag marks a project, location or client across accounts. Use them before you create a new top-level account.
The rule of thumb is simple. Ask what decision the detail supports. If you would raise a price, cut a cost or pay a bonus based on the number, the detail earns its place. If you would not, leave it out and keep the chart short.
| Need | Better tool | Why |
|---|---|---|
| See profit by client or project | Class or tag | Keeps one set of expense accounts |
| See software spend by tool | Sub-account | Rolls up to one parent line |
| Separate two locations | Class or location tag | Avoids two full charts |
| Track one-time costs, such as a launch | Tag for the project | Easy to remove later |
| Split owner pay from payroll | Separate accounts | Reports and tax treatment differ |
Keep a short written list of every sub-account and tag, with one line on what belongs in it. The list is the coding guide your team will use. When someone new takes over the books, that page saves hours.
Review the chart every quarter against the reports you actually read. If nobody has used an account in a year, ask your bookkeeper to retire it. Closing an unused account is safe. Merging accounts that hold history changes past reports, so do that only at a month end, and tell your CPA first.
Next step
If your accounts feel messy, see our bookkeeping service. You can book a free strategy call to talk through your books.
Frequently asked questions
What is a chart of accounts in simple terms?
It is the list of categories your books use to sort money. Examples are Checking, Rent, Sales and Loan Payable. Each transaction is recorded in one or more of these accounts. The list drives every report you read.
How many accounts does a small business need?
There is no fixed number. Start with a short list and add accounts only when a report needs the detail. Too many accounts make coding harder and reports noisier. Your bookkeeper can size the chart to your volume.
Can I change my chart of accounts later?
Yes. You can add, rename and reorganize accounts at any time. Merging or deleting accounts that hold history needs care, because it changes past reports. Make changes at month end and tell your CPA before a tax year closes.
What is the difference between a chart of accounts and a general ledger?
The chart of accounts is the list of categories. The general ledger is the record of every transaction posted to those categories. The chart is the table of contents. The ledger is the full book.
Should my chart of accounts match my tax return?
It should map cleanly to it. Your CPA can tell you which expense lines your return needs. Build your accounts so each one rolls up to a tax line without guesswork. Ask your CPA to review the chart once.
Can a Peachtree bookkeeper help with my chart of accounts?
Raise it in your free 30-minute consultation. Peachtree bookkeepers mainly work in QuickBooks Online and handle transaction management, account reconciliation and monthly reports. They also work alongside your CPA, who can say which accounts the tax return needs.
