The Chart of Accounts
Build the organized, numbered list of every account your business uses to record its money.
TL;DR
- Keep a
chartOfAccounts: the master list of every account you use. - Number accounts so the first digit shows the
accountType. - Start lean and add accounts only when you truly need them.
What It Is
The Master ListEvery account your books can record into.
Names + numbers, grouped by typeThe Filing SystemEach entry files into one of these accounts.
Transactions sort into accountsFeeds the ReportsAccount totals roll up into statements.
Chart -> statementsSet It EarlyDesign it before you start recording.
Plan first, record secondThe Numbering System
First Digit = TypeThe leading digit names the account type.
1 asset, 2 liability, 3 equity...Ranges by TypeEach type gets its own block of numbers.
1000s, 2000s, 3000s, 4000s, 5000sLeave GapsSpace numbers so new accounts fit in.
1000, 1010, 1020...Order Matches ReportsNumbering follows the statement order.
Balance sheet, then incomeThe Five Ranges
1000s AssetsCash, receivables, inventory, equipment.
Cash 1000, Inventory 12002000s LiabilitiesPayables, loans, and other debts.
Payable 2000, Loan 21003000s EquityOwner capital and retained earnings.
Owner's Capital 30004000s+ Revenue and ExpensesSales in the 4000s, costs in the 5000s.
Sales 4000, Rent 5000Design It Well
Start LeanOnly the accounts you actually use.
Fewer accounts, faster booksMatch Your BusinessName accounts for how you earn and spend.
Your categories, not generic onesGroup LogicallyKeep similar costs near each other.
Utilities together, travel togetherGrow CarefullyAdd accounts only when tracking demands it.
Split only when it mattersTips
- Leave gaps between
accountNumbers, like 1000, 1010, 1020, so you can slot new accounts in later without renumbering everything. - Match your chart to the lines on your
financialStatements, so reports come together with almost no extra sorting.
Warnings
- An overstuffed
chartwith dozens of near-duplicate accounts makes bookkeeping slower and reports harder to read. - Renaming or renumbering an account mid-year can break comparisons, so plan your
chartbefore you start recording.
In Practice
Set up a small numbered chart of accounts grouped by the five types.
You start a coffee cart and need a simple chart of accounts to record its money.
- Assets (1000s): Cash 1000, Inventory 1200, Equipment 1500.
- Liabilities (2000s): Accounts Payable 2000, Loan 2100.
- Equity (3000s): Owner's Capital 3000.
- Revenue and expenses: Sales 4000; Rent 5000, Supplies 5100.
A clean, numbered chart with each account grouped by type.
The leading digit tells you an account's type at a glance.
FAQ
It is the organized master list of every account a business uses to record transactions. Each account has a name and usually a number, and the accounts are grouped by type: assets, liabilities, equity, revenue, and expenses. Think of it as the filing system that every journal entry files into, so the totals roll up into clean statements.
By convention, the first digit signals the account type. A common scheme is 1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for revenue, and 5000s and up for expenses. Within each range, individual accounts get their own numbers, so you can tell an account's type at a glance.
As few as cleanly capture your business. A small service business might need only a couple dozen; a shop with inventory needs more. Start lean, since every account is one more choice to make when recording, and add new ones only when an expense or category genuinely needs to be tracked separately.
Yes, that is the point. The five type ranges are standard, but the accounts inside them should mirror how your business actually spends and earns. Accounting software ships with a default chart you can rename, trim, or extend so your reports speak in your own categories rather than generic ones.