Your chart of accounts is the backbone of your bookkeeping: the complete list of accounts every transaction is recorded in. Set it up well and your reports are clear, your accountant is happy and year end is painless. Set it up badly, with too many accounts, vague names or no structure, and every report becomes a puzzle. Here's how to build one that works.
What a chart of accounts is
It's a numbered list of every account in your books, grouped by type. Each account is a bucket for one kind of value: your bank balance, money customers owe you, sales, rent and so on. In double-entry bookkeeping, every transaction moves value between two or more of these accounts; see double-entry bookkeeping explained if that's new.
The five account types
Every chart of accounts is organised around five types:
- Assets: what the business owns or is owed
- Liabilities: what it owes
- Equity: the owners' stake
- Income: what it earns
- Expenses: what it costs to run
The first three make up the balance sheet; the last two make up the profit and loss statement.
A numbering scheme that scales
Give each type its own number range, so the type is obvious from the code and there's room to add accounts later:
| Range | Type |
|---|---|
| 1000–1999 | Assets |
| 2000–2999 | Liabilities |
| 3000–3999 | Equity |
| 4000–4999 | Income |
| 5000–6999 | Expenses |
Leave gaps (1010, 1020, 1030) so new accounts fit in the right place without renumbering.
A starter chart of accounts for a small business
Assets
- 1010 Bank account
- 1020 Savings account
- 1200 Accounts receivable
- 1300 Prepayments
- 1500 Equipment
- 1510 Accumulated depreciation
Liabilities
- 2010 Accounts payable
- 2100 VAT or sales tax payable
- 2200 Credit card
- 2300 Loans
Equity
- 3000 Owner's capital
- 3100 Owner's drawings
- 3200 Retained earnings
Income
- 4100 Sales or service revenue
- 4200 Other income
Expenses
- 5010 Cost of sales
- 5100 Rent
- 5200 Software and subscriptions
- 5300 Office supplies
- 5400 Marketing and advertising
- 5500 Professional fees
- 5600 Travel
- 5700 Insurance
- 5800 Bank charges
- 6000 Wages and salaries
How to tailor it to your business
- Match how you make money. A business with products and services might split income into 4100 Product sales and 4110 Service income.
- Track what you'll want to report on. If marketing spend matters, give paid ads its own account.
- Think about tax. Ask your accountant which expense categories your tax return needs, and mirror them.
- Keep VAT separate. Tax you collect is a liability, not income.
Mistakes to avoid
- An account per customer or supplier. Use contacts with one receivables and one payables account instead.
- Too many accounts. Fifteen kinds of "office" expense make reports harder to read, not easier.
- Vague names like "Miscellaneous" or "Other expenses" that become dumping grounds.
- Repurposing old accounts. Changing what an account means breaks comparisons with past periods.
- Mixing personal and business. Owner withdrawals go to drawings, not expenses.
Start with a standard chart, then adjust
You rarely need to design a chart of accounts from scratch. Good bookkeeping software starts you with a standard set. Zelvorm Books builds a standard chart of accounts the moment you name your business, with sensible numbering, and you can add or edit accounts as you grow. It's free double-entry bookkeeping for small businesses.
Example charts for three kinds of business
The starter list above works for most businesses. Here's how three different businesses might adjust it.
A consultant or freelancer
- 4100 Consulting fees
- 4110 Training income
- 5010 Subcontractors
- 5200 Software and subscriptions
- 5600 Travel
- 5650 Client entertainment
Simple income, few direct costs, most spending on tools and travel.
An online shop
- 1400 Stock
- 4100 Product sales
- 4150 Shipping charged to customers
- 5010 Cost of goods sold
- 5020 Shipping costs
- 5030 Payment processing fees
- 5040 Packaging
- 5400 Advertising
Stock becomes an asset, and the costs of each sale are tracked separately so gross margin is accurate.
A café
- 1400 Food and drink stock
- 4100 Food sales
- 4110 Drink sales
- 5010 Food purchases
- 5020 Drink purchases
- 5100 Rent
- 5900 Repairs and maintenance
- 6000 Wages
Splitting food and drink income and costs shows which side of the business earns more.
Sub-accounts: when they help
Some software lets you nest accounts, such as 5400 Marketing with sub-accounts 5410 Paid ads, 5420 Print and 5430 Sponsorship. Sub-accounts help when you want both the big picture (total marketing) and the detail. Use them sparingly: two levels is usually plenty.
Common questions about specific accounts
- Where do loan repayments go? The capital part reduces the loan liability; only interest is an expense.
- Where does VAT go? In a liability account (VAT payable), with VAT on purchases in an asset account or netted against it.
- Where do owner withdrawals go? In drawings (sole traders and partnerships) or dividends (companies), never expenses.
- Where do customer deposits go? In a liability account (deferred income or customer deposits) until the work is done.
- What about a "suspense" account? A temporary holding place for entries you can't classify yet. Clear it every month; a growing suspense balance hides problems.
Review your chart of accounts once a year
At year end, spend twenty minutes reviewing:
- Accounts that were never used: make them inactive.
- Accounts with tiny, mixed balances: merge them going forward.
- "Miscellaneous" accounts with large balances: split them into meaningful accounts.
- New activities: add accounts before the new year starts.
- Your accountant's suggestions from the year-end process.
Changes are best made at the start of a financial year, so comparisons with previous years stay meaningful. To see how your accounts feed your reports, read about the trial balance.
The short version
Group accounts into the five types, number them in ranges with gaps, keep the list short and meaningful, keep VAT and owner drawings separate, and use contacts rather than an account per customer.
