Chart of Accounts for a Small Business, With an Example

Quick Answer: A chart of accounts for a small business is the numbered list of every bucket your money is sorted into: assets, liabilities, equity, income and expenses. Most small businesses need 30 to 60 accounts, numbered in blocks (1000s for assets through 6000s for expenses), with expense names that line up with the tax return you file.

Your chart of accounts is the master list your bookkeeping uses to classify each transaction. Every deposit and payment on a bank statement lands in exactly one account on that list, and your profit and loss statement and balance sheet are simply totals of those accounts. Keep it short, number it in blocks, and name expense accounts after the lines on your tax return.

What is a chart of accounts, in plain terms?

Think of it as the set of labeled folders that your bookkeeping files transactions into. A coffee shop's card sale goes into a "Sales" account. The rent payment goes into "Rent." The loan from the bank sits in "Loan payable." At the end of the month the folders are added up, and those totals become the financial statements.

The list is split into five groups because double-entry bookkeeping needs them:

• Assets: what the business owns or is owed (cash in checking, money customers owe you, equipment).
• Liabilities: what it owes (credit card balances, sales tax collected but not yet paid, loans).
• Equity: the owner's stake (money put in, draws taken out, profits kept over the years).
• Income: money earned from selling goods or services.
• Expenses: what it costs to run the business.

The IRS describes double-entry bookkeeping in Publication 583 as a system in which each account has "a left side for debits and a right side for credits," and notes that a simpler single-entry system is a practical option when you are just starting out. Even if you keep single-entry records in a spreadsheet, a chart of accounts still gives you consistent categories.

How should the accounts be numbered?

The common convention gives each group a block of numbers. The specific numbers are a habit, not a rule, but following the habit means your accountant will recognize the layout instantly.

Leave gaps of ten between accounts. When you later need "6210 Website hosting" next to "6200 Software subscriptions," there is room for it without renumbering everything.

Accounting software such as QuickBooks Online and Xero layers its own account types on top of whatever names you choose. Your numbering still helps: it controls the sort order on reports and keeps the list readable when it grows.

An example chart of accounts for a small service business

Here is a starting list for a one- or two-person service business, such as a consultant, designer or contractor that does not hold inventory. Delete what you do not use rather than keeping it "just in case."

Assets

• 1010 Business checking
• 1020 Business savings
• 1200 Accounts receivable
• 1400 Prepaid expenses
• 1500 Computer equipment
• 1590 Accumulated depreciation

Liabilities

• 2010 Business credit card
• 2100 Sales tax payable (if you collect it)
• 2200 Payroll liabilities (if you have employees)

Equity

• 3010 Owner contributions
• 3020 Owner draws
• 3900 Retained earnings

Income

• 4010 Consulting income
• 4020 Reimbursed expenses billed to clients

Expenses

• 6010 Advertising and marketing
• 6050 Bank and merchant fees
• 6100 Contract labor
• 6150 Insurance
• 6200 Software and subscriptions
• 6250 Office supplies
• 6300 Legal and professional fees
• 6400 Travel
• 6450 Meals
• 6500 Phone and internet
• 6900 Other expenses

That is roughly 30 accounts, which is plenty. A business that sells physical products adds an inventory asset and a cost-of-goods block; one with employees adds wages, payroll taxes and benefits.

How many accounts does a small business actually need?

Fewer than you think. A chart of accounts with 150 expense lines does not produce better information; it produces inconsistent coding, because nobody remembers whether lunch with a client goes to "Meals," "Client entertainment" or "Business development." The reports end up spreading one kind of spending across three accounts.

A useful test for each expense account: would you make a different decision if you saw this number separately? You probably would for software subscriptions, which creep up quietly. You probably would not for "Postage" versus "Shipping supplies" in a business that mails three envelopes a month. Merge accounts that fail the test and use a memo or a tag for the detail.

The other test is the tax return. If you file Schedule C, its expense lines include advertising, car and truck expenses, contract labor, insurance, legal and professional services, office expense, supplies, travel, meals and utilities. Naming your accounts to match, or at least mapping each account to one line, means year-end preparation is a sum rather than a sorting exercise. The Schedule C instructions describe what belongs on each line. For a fuller treatment of which categories carry over to deductions, see bank statement deduction categories.

How do you map bank statement transactions to accounts consistently?

This is where most small-business books go wrong. The chart is fine on paper; the coding drifts month to month because different transactions from the same vendor are filed differently. Three habits fix it.

1. Keep a vendor map. A two-column table, "description contains" and "account," turns coding into a lookup. In Excel, an XLOOKUP against a partial match, or a column of IF(ISNUMBER(SEARCH(...))) tests, assigns most rows automatically. Accounting software calls the same idea bank rules.

2. Never code a transfer as income or expense. Moving money from checking to savings, or paying the credit card from checking, changes which asset or liability holds the money. It is not spending. Miscoded card payments are the single most common reason a small business's expenses look doubled.

3. Code the whole month at once. Working from the statement in a spreadsheet lets you sort by description and code twenty identical rows in one pass. If your bank's CSV export reaches back far enough, use it. If you have only PDF statements, for example while catching up on last year, QuickBankConvert converts them into rows with date, description and signed amount, so you can paste them next to the vendor map. The PDF is uploaded and processed on our servers, and you never share a bank login. More on this workflow is in bank statement categorization.

Owner draws deserve a mention of their own. A sole proprietor paying a personal bill from the business account has not incurred a business expense; that payment belongs in the owner draws equity account. Keeping personal spending out of the expense accounts is what makes the profit figure believable.

Changing the chart once the books are running

You will need to add accounts over time. A few rules keep that from causing damage:

• Add, don't rename, when meaning changes. Renaming "Contractors" to "Professional fees" rewrites history in every past report. Create the new account and stop using the old one from a set date.
• Retire accounts rather than deleting them once they hold transactions. Mainstream accounting packages let you hide or archive an account so its history stays intact; check your software's help pages for the exact control.
• Change at a period boundary. Starting a new account on the first day of a month or quarter keeps comparisons clean.
• Write the vendor map change at the same time, or the next import will keep sending transactions to the old account.

If you are building your books in a spreadsheet first, the bookkeeping spreadsheet template uses this kind of chart as its category list.

Related guides

• Bookkeeping for small business
• Track business expenses from bank statements
• Month-end closing checklist in Excel
• QuickBooks integration guide