How to Set Up a Chart of Accounts

A chart of accounts is the list of categories every dollar in your business gets sorted into. Set it up well and your reports make sense, your tax prep gets easier and you can see where money really goes. Set it up badly and you end up with 200 confusing categories or one giant "miscellaneous" bucket. Here is how to build a clean one from scratch.

Open ledger book with lined pages lying on a dark wooden desk, ready for recording business transactions — Whether it lives in a ledger or a spreadsheet, a chart of accounts gives every transaction a home.

Key takeaways

A chart of accounts is a numbered list of every category your business uses to record money coming in, going out and staying put.
Almost every chart uses five main types: assets, liabilities, equity, income and expenses.
A simple numbering system, such as 1000s for assets and 6000s for expenses, keeps the list tidy and easy to extend.
Fewer, clearer accounts beat many vague ones. As a rule of thumb, a few dozen accounts is plenty to start.
Review the chart once a year, ideally before you close the books, and add accounts only when you need a new report.

If you have ever stared at a profit and loss report and thought "what on earth is in Other Expenses?", this guide is for you. The chart of accounts is the skeleton of your bookkeeping. Every invoice, receipt, payment and transfer gets assigned to one of its categories, and every report you run is built from those assignments. When the skeleton is clear, the reports are clear too.

December is a good time to tackle this. You are about to close one year and open another, and starting the new year with a clean structure saves hours of reclassifying later. A quick note before we start: this article is general information about bookkeeping, not accounting or tax advice. Rules and reporting needs vary by country and business type, so check with an accountant or bookkeeper, especially before you change accounts that already hold history.

What a chart of accounts is and why it matters

A chart of accounts is simply a list. Each line has an account number, an account name, an account type and, ideally, a short description of what belongs there. In the UK you may hear the same list called nominal codes or the nominal ledger, but the idea is identical.

It matters for three practical reasons:

Reports. Your profit and loss statement and balance sheet are just your accounts added up and grouped. Good accounts make reports you can actually read.
Taxes. When your expense categories line up with the categories on your tax return, year-end prep is mostly a matter of copying totals.
Decisions. If you want to know how much you spend on marketing or what each product line earns, the chart has to separate those things in the first place.

The five main account types

Every account belongs to one of five types. The first three appear on your balance sheet, a snapshot of what the business owns and owes. The last two appear on your profit and loss statement, which shows performance over a period.

Assets: what the business owns or is owed. Bank accounts, cash, money customers owe you, inventory, equipment and vehicles.
Liabilities: what the business owes. Credit cards, loans, money you owe suppliers, sales tax or VAT collected but not yet paid, and payroll taxes due.
Equity: the owner's stake. Money you put in, money you took out and profits kept in the business over time.
Income: money earned from selling products or services, plus smaller items like interest received.
Expenses: the costs of running the business, from cost of goods sold to rent, software, travel and fees.

How account numbering works

Numbers make the chart easy to sort, scan and extend. There is no single legal standard for small businesses, but a common convention groups accounts by type in blocks of a thousand:

1000 to 1999: assets
2000 to 2999: liabilities
3000 to 3999: equity
4000 to 4999: income
5000 to 5999: cost of goods sold or direct costs
6000 to 7999: operating expenses
8000 to 8999: other income and expenses, such as interest

Inside each block, leave gaps. Number accounts 6010, 6020, 6030 rather than 6001, 6002, 6003. When you later need a new account that belongs between two existing ones, you have room to slot it in without renumbering everything.

Most accounting software comes with a default chart and numbering you can edit, so you rarely start from a blank page. The job is usually trimming and renaming, not building from nothing.

Example

Imagine Leo, who runs a small coffee roastery that sells beans online and to two local cafes. He keeps two income accounts, 4010 Online sales and 4020 Wholesale sales, because he wants to see which channel grows faster. Under cost of goods sold he has 5010 Green coffee beans, 5020 Packaging and 5030 Shipping to customers. His operating expenses include 6010 Rent, 6020 Utilities, 6110 Advertising and 6210 Software subscriptions. When a cafe asks for a bigger discount, Leo can look at wholesale income against his direct costs and answer with confidence. (Leo is a made-up example.)

How to set up your chart of accounts step by step

Whether you are starting fresh or cleaning up a messy chart, this process keeps things manageable.

Start from a standard template. Use the default list your bookkeeping system offers or the template below, rather than inventing everything yourself.
List the reports you want. Write down the questions you want answered each month, such as "How much did each sales channel earn?" or "What do we spend on contractors?" Each question may need its own account.
Set up your balance sheet accounts. Add one asset account for each bank account, one liability account for each credit card and loan, and accounts for sales tax or VAT if you collect it.
Split income by what matters. Create income accounts for your main revenue streams. Two to five is plenty for most small businesses.
Separate direct costs from overheads. Costs tied directly to what you sell go under cost of goods sold. Everything else goes under operating expenses.
Match expense accounts to your tax return. Ask your accountant which categories your return uses, and name your expense accounts so the totals map across easily.
Write a one-line description for each account. "6210 Software subscriptions: monthly and annual tools used to run the business." Descriptions stop you and anyone helping you from guessing.
Delete or hide what you will not use. Default charts often include accounts for industries you are not in. Fewer choices mean fewer mistakes.

Pro tip

Before creating a new account, ask: "Will I ever want a report that shows this number on its own?" If the answer is no, it probably belongs in an existing account. If you want more detail without more accounts, many bookkeeping systems let you add tags or classes on top of the chart.

Close-up of vintage ledger pages filled with neat handwritten entries and columns of figures — Clear account names and numbers turn rows of entries into reports you can actually read.

A chart of accounts template you can copy

Here is a starter structure for a small business. Copy it into a spreadsheet, keep the columns and adjust the rows to fit what you do. The account names are examples, not a required list.

Number	Account name	Type	What goes here
1010	Business checking	Asset	Your main operating bank account
1200	Accounts receivable	Asset	Money customers owe you for invoices not yet paid
2010	Business credit card	Liability	Balance owed on the company card
3010	Owner contributions	Equity	Money you put into the business
4010	Product sales	Income	Revenue from selling goods
5010	Materials and supplies for resale	Cost of goods sold	Direct costs of what you sell
6110	Advertising and marketing	Expense	Ads, printed flyers, sponsorships

A full starter chart will have more rows than this, but the pattern stays the same. Many small businesses work comfortably with 30 to 60 accounts in total. That is a rule of thumb rather than a rule, and a business with inventory, staff and several locations will naturally need more than a solo consultant.

Accounts almost every business needs

One asset account per bank account, plus petty cash if you use it.
Accounts receivable and accounts payable if you invoice or receive bills on credit.
A sales tax or VAT payable account if you collect it.
Owner contributions and owner draws (or dividends, depending on your structure).
Retained earnings, which is usually created for you.
Bank fees, insurance, rent, software, professional fees, travel and meals, and office supplies.

Tailoring the chart to your type of business

The basic structure works for everyone, but a few tweaks make it fit your business much better.

Product businesses

Give cost of goods sold real attention. Separate materials, packaging, inbound freight and outbound shipping if they are significant, and add an inventory asset account. This lets you see your true margin on what you sell rather than lumping it in with general overheads.

Service businesses and agencies

Your biggest direct cost is usually people. Create a direct cost account for subcontractors and freelancers you hire for client work, kept apart from overheads like admin help. If you sell distinct services, such as design, development and retainers, split income so you can see which line pays best.

Freelancers and solo owners

Keep it lean. One or two income accounts, a handful of expense accounts that match your tax return, and clear owner contribution and draw accounts are often enough. The main goal is keeping business and personal money visibly separate.

Common mistake

Creating an account for every vendor. "Office supplies: Store A" and "Office supplies: Store B" tell you nothing useful and clutter every report. The vendor is already recorded on each transaction. Accounts should describe what the money was for, not who received it.

Keeping your chart of accounts clean over time

A chart of accounts is not a set-and-forget job. Businesses change, and the chart should change with them, but carefully.

Set one owner. Decide who is allowed to add or rename accounts. In a small team, that is usually you or your bookkeeper.
Avoid deleting accounts with history. Mark old accounts inactive instead, so past reports still add up.
Review once a year. Before closing the books for the year, scan the list. Merge accounts you barely used, rename confusing ones and check whether "Miscellaneous" has grown too large.
Keep a change log. A simple note of what changed and when helps your accountant understand why a number moved between years.
Watch the miscellaneous account. As a rule of thumb, if it holds more than a few small items each month, something in there deserves its own account.

If you have a year of messy history, do not try to fix every past transaction at once. Agree a clean structure with your accountant, start using it from the first day of the new year and reclassify old items only if you need comparable reports.

Your chart of accounts action plan

Export or write down your current list of accounts
List the five to ten questions you want your reports to answer
Set up balance sheet accounts for every bank account, card and loan
Split income into two to five meaningful streams
Separate direct costs from operating expenses
Match expense names to the categories on your tax return
Add numbers with gaps and a one-line description for each account
Hide unused accounts and book a yearly review before year-end

Frequently asked questions

How many accounts should a small business have?

There is no fixed number. As a rule of thumb, many small businesses do well with 30 to 60, while a solo freelancer may need fewer. Aim for enough detail to answer your real questions and match your tax return, and no more.

Can I change my chart of accounts in the middle of the year?

Yes, you can add and rename accounts at any time. Be more careful with merging or deleting accounts that already hold transactions, because it changes historical reports. If in doubt, mark old accounts inactive and talk to your accountant first.

Do I need account numbers at all?

Not strictly, but they help. Numbers keep accounts in a logical order, make the type of each account obvious at a glance and leave room to grow. Even a very small business benefits from a simple numbering scheme.

Is the chart of accounts the same in the US and the UK?

The structure is the same in both: assets, liabilities, equity, income and expenses. Names and tax-related accounts differ, such as sales tax in the US and VAT in the UK. Match your accounts to local reporting needs and check with a local accountant.

The bottom line

A good chart of accounts is short, numbered and built around the questions you want your numbers to answer. Start from a standard template, group accounts into the five main types, split income and costs where it helps you decide, and describe each account in one line. Then protect it: add accounts sparingly and review the list once a year.

Spend an hour on it before the new year begins. Every transaction you record afterward lands in the right place, and your reports finally start telling you something useful.