What is a chart of accounts?
A chart of accounts is a numbered list of every account a business uses to record transactions, grouped into five types: assets, liabilities, equity, income and expenses. Each invoice, bill, payment and journal entry posts to these accounts, and the balance sheet and profit and loss statement are built by adding them up.
A well-designed chart makes your reports readable at a glance. A thin one hides where money goes; a bloated one produces reports nobody can read and leaves staff guessing which account to use.
How should a chart of accounts be numbered?
| Range | Account type | Appears on |
|---|---|---|
| 1000–1999 | Assets | Balance sheet |
| 2000–2999 | Liabilities | Balance sheet |
| 3000–3999 | Equity | Balance sheet |
| 4000–4999 | Income | Profit and loss |
| 5000–5999 | Cost of goods sold | Profit and loss |
| 6000–7999 | Operating expenses | Profit and loss |
| 8000–8999 | Other income and expenses (interest, gains, losses) | Profit and loss |
Common account number ranges
The order follows the financial statements: balance sheet accounts first, roughly in order of liquidity, then income statement accounts. Exact ranges vary by country and software. Consistency matters more than the specific numbers: anyone should be able to tell an account’s type from its first digit.
Small business chart of accounts example
| Number | Account name | Type |
|---|---|---|
| 1000 | Cash on hand | Asset |
| 1010 | Business bank account | Asset |
| 1100 | Accounts receivable | Asset |
| 1200 | Inventory | Asset |
| 1300 | Prepaid expenses | Asset |
| 1500 | Equipment | Asset |
| 1510 | Accumulated depreciation – equipment | Asset (contra) |
| 2000 | Accounts payable | Liability |
| 2100 | Sales tax / VAT / GST payable | Liability |
| 2200 | Payroll liabilities | Liability |
| 2300 | Customer deposits | Liability |
| 2500 | Business loan | Liability |
| 3000 | Owner’s capital | Equity |
| 3100 | Owner’s drawings | Equity |
| 3200 | Retained earnings | Equity |
| 4000 | Sales revenue | Income |
| 4100 | Service revenue | Income |
| 4900 | Sales discounts and returns | Income (contra) |
| 5000 | Cost of goods sold | Cost of goods sold |
| 5100 | Freight and delivery in | Cost of goods sold |
| 6000 | Salaries and wages | Operating expense |
| 6100 | Rent | Operating expense |
| 6200 | Utilities | Operating expense |
| 6300 | Marketing and advertising | Operating expense |
| 6400 | Software and subscriptions | Operating expense |
| 6500 | Professional fees | Operating expense |
| 6600 | Bank and payment processing fees | Operating expense |
| 6700 | Depreciation | Operating expense |
| 8000 | Interest expense | Other expense |
Starter chart for a small trading or services business
Accounts to add for your industry
| Business type | Accounts worth adding |
|---|---|
| Retail and e-commerce | Payment processor clearing, marketplace fees, shipping income, inventory shrinkage, sales returns |
| Professional services | Unbilled revenue (work in progress), client retainers held (liability), subcontractor costs, reimbursable expenses |
| SaaS and subscriptions | Deferred revenue (liability), subscription revenue, services revenue, hosting costs (cost of sales) |
| Construction and trades | Retention receivable, retention payable, contract work in progress, materials and equipment hire |
| Restaurants and cafés | Food cost, beverage cost, tips payable, delivery platform commissions |
Common additions by business type
Tax accounts by country
- India (GST): separate input and output accounts for CGST, SGST and IGST, so input tax credit can be matched against output tax, plus TDS receivable and TDS payable.
- United Kingdom (VAT): a VAT control account, or separate VAT on sales and VAT on purchases accounts that net to the amount due on each return.
- United States: sales tax payable (by state if you collect in several) and payroll tax liabilities.
- Everywhere: keep tax collected out of revenue. It belongs to the tax authority and sits in a liability account until paid.
How to set up a chart of accounts, step by step
- 1
Start from a standard template
Begin with a template for your country and business type. It already contains the control accounts (receivables, payables, tax) your software and accountant expect.
- 2
Work back from your reports and tax return
List the lines you want on your P&L and the categories your tax return asks for. Each should map to one account or a small group.
- 3
Separate cost of goods sold from overheads
Direct costs belong in cost of goods sold so gross profit means something. Rent and admin salaries are overheads.
- 4
Number with gaps
Use steps of 10 or 100 so new accounts fit in the right place later.
- 5
Enter opening balances
If you are already trading, enter balances for bank, receivables, payables, stock, assets, loans and equity at your start date, and confirm debits equal credits.
- 6
Review after three months
Merge accounts that are never used, split any account that has become a catch-all, and deactivate what you no longer need.
How many accounts should a small business have?
Getting the level of detail right
Too thin
- One "Expenses" account for everything
- No way to see which costs are rising
- Tax categories rebuilt by hand each year
- Gross profit meaningless without cost of goods sold
Too detailed
- One account per vendor or product
- Hundreds of near-empty accounts
- Staff guess which account to use
- Reports too long to read
Use other records for detail, not more accounts
Track who you bought from with vendor records, what you sold with items, and which branch or project it relates to with locations or tags. The chart of accounts answers "what kind of money is this?" Leave the other questions to the records built for them.
Chart of accounts mistakes to avoid
- Deleting an account that has transactions. Deactivate it so historical reports still add up.
- Mixing personal and business spending. Use an owner’s drawings account and a separate business bank account.
- Putting loan repayments in expenses. Only the interest is an expense; the principal reduces the loan.
- Recording sales tax, VAT or GST collected as revenue.
- Leaving a balance in "Miscellaneous" or "Suspense". Clear it every month.
- Changing an account’s type after it has transactions, which silently changes past reports.
Setting up your chart of accounts in AccountDesq
AccountDesq creates a standard chart of accounts for each new workspace using the numbering bands above: assets in the 1000s, liabilities in the 2000s, equity in the 3000s, income in the 4000s, cost of goods sold in the 5000s and operating expenses from 6000. When you add an account, it suggests the next free number in the right band, in steps of 10, and you can change it. Expense accounts carry an explicit cost-of-sales setting, so a custom account lands in the right section of the P&L whatever its number.
What are the five main types of accounts?
Assets, liabilities, equity, income (revenue) and expenses. Cost of goods sold is a type of expense, usually shown separately so gross profit can be calculated.
How many accounts should a small business chart of accounts have?
There is no fixed number. Many small businesses work well with roughly 30 to 80 active accounts: enough to separate what you need to report on, few enough that everyone posts consistently.
What is the standard numbering for a chart of accounts?
A common convention is 1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for income, 5000s for cost of goods sold and 6000s and above for operating and other expenses. Ranges vary by country and software.
What is the difference between a chart of accounts and a general ledger?
The chart of accounts is the list of accounts. The general ledger is the record of every transaction posted to those accounts, with running balances.
Can I change my chart of accounts later?
Yes. You can add, rename and deactivate accounts at any time. Avoid deleting accounts with history and avoid changing an account’s type after it has transactions.
Design the chart of accounts around the questions you will ask of your reports.
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