Short answer
A chart of accounts is the list of every account in your bookkeeping system, grouped into five types: assets, liabilities, equity, income and expenses. A few dozen accounts is usually enough for a small business. A common setup numbers them by type (1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for income, 5000s and up for costs and expenses) and names the expense accounts to match the lines on the business's tax return.
When you record a sale, a bill or a loan payment, your bookkeeping software asks which account it belongs to. The chart of accounts is that list of choices. It decides what your profit and loss statement and balance sheet look like, and how easily your accountant can turn them into a tax return.
Most accounting software, including QuickBooks Online and Xero, starts you with a default list. It works, but it is rarely a good fit without some editing. This guide shows a simple structure you can adapt.
The five types of accounts
| Type | What it holds | Examples | Report |
|---|---|---|---|
| Assets | What the business owns | Checking account, accounts receivable, equipment | Balance sheet |
| Liabilities | What the business owes | Credit cards, loans, sales tax payable, payroll taxes payable | Balance sheet |
| Equity | The owner's stake | Owner's contributions, owner's draws, retained earnings | Balance sheet |
| Income | Money earned from customers | Sales, service revenue | Profit and loss |
| Expenses | Costs of running the business | Rent, software, wages, advertising | Profit and loss |
Accounting software keeps the books in double entry. IRS Publication 583 describes it: each transaction is recorded as a debit in one account and a credit in another, and the totals must balance. It calls double entry the system with built-in checks and balances. That is why a payment to a supplier reduces your bank account (an asset) and also records the expense or reduces what you owe.
A simple chart of accounts template
Here is a starting template for a small service business. Numbering by type is a common convention, not a rule, but it keeps the list in order and leaves room to add accounts later.
| Number | Account | Type |
|---|---|---|
| 1000 | Business checking | Asset |
| 1010 | Business savings | Asset |
| 1200 | Accounts receivable | Asset |
| 1500 | Equipment and vehicles | Asset |
| 1510 | Accumulated depreciation | Asset (reduces equipment) |
| 2000 | Accounts payable | Liability |
| 2100 | Business credit card | Liability |
| 2200 | Sales tax payable | Liability |
| 2300 | Payroll taxes payable | Liability |
| 2500 | Business loan | Liability |
| 3000 | Owner's contributions | Equity |
| 3100 | Owner's draws | Equity |
| 3900 | Retained earnings | Equity |
| 4000 | Service revenue | Income |
| 4100 | Product sales | Income |
| 5000 | Cost of goods sold | Cost of sales |
| 6000 | Advertising | Expense |
| 6100 | Car and truck expenses | Expense |
| 6150 | Contract labor | Expense |
| 6200 | Insurance | Expense |
| 6300 | Legal and professional services | Expense |
| 6400 | Office expense | Expense |
| 6500 | Rent or lease | Expense |
| 6600 | Software and subscriptions | Expense |
| 6700 | Taxes and licenses | Expense |
| 6800 | Travel | Expense |
| 6810 | Meals | Expense |
| 6900 | Utilities | Expense |
| 7000 | Wages | Expense |
| 7100 | Bank fees | Expense |
A retailer would add inventory (an asset) and more cost of goods sold detail. A business with employees would add accounts for each payroll tax and benefit. A business that collects sales tax keeps it in a liability account, because the money belongs to the state; our sales tax team can set that up by state.
Match expense accounts to your tax return
The fastest tax return comes from books whose expense accounts line up with the return. If you file Schedule C, as most sole proprietors and single-member LLC owners do, its expense lines include advertising, car and truck expenses, commissions and fees, contract labor, depreciation, insurance, interest, legal and professional services, office expense, rent or lease, repairs and maintenance, supplies, taxes and licenses, travel, deductible meals, utilities and wages. Naming your accounts the same way means each total drops straight onto the right line.
Meals deserve their own account, separate from travel, because Schedule C reports deductible meals on their own line. Not sure which return you file? Our article on sole proprietor vs. LLC explains the default rules.
Rules that keep a chart of accounts useful
- Keep it short. An account should be big enough to matter on a report. A few dozen accounts is usually plenty.
- Don't make an account per vendor or customer. Your software tracks names separately. "Software and subscriptions" beats ten accounts named after apps.
- Avoid a large "miscellaneous" account. If it grows, split it into real categories.
- Separate the owner's money. Record money you put in or take out in equity accounts, not as income or expenses. IRS Publication 583 also recommends a separate business bank account.
- Change it at year end where you can. Renaming or merging accounts mid-year makes year-on-year reports harder to compare.
- Write down what goes where. A one-line description per account keeps everyone posting the same way.
Chart of accounts and your accounting method
Accounts receivable and accounts payable matter most if you keep accrual books. On a pure cash basis they may stay empty. Our guide to cash vs. accrual accounting explains the difference. Whichever you use, reconcile the bank and card accounts every month; see how to do a bank reconciliation.
How Top Accounting Firm can help
Our bookkeeping service sets up or cleans up your chart of accounts in QuickBooks Online or Xero, then records and reconciles every month. New to bookkeeping? Start with what bookkeeping is, or book a free consultation.
Frequently asked questions
What is a chart of accounts?
How many accounts should a small business have?
How do you number a chart of accounts?
Should my expense accounts match my tax return?
Where do I record money I take out of my business?
Can I change my chart of accounts later?
Sources
- IRS: Publication 583, Starting a Business and Keeping Records
- IRS: Instructions for Schedule C (Form 1040)
- IRS: Recordkeeping
Checked against these sources on October 26, 2026. This article is general information, not tax or legal advice. Rules, fees and deadlines change, so confirm with the official source or a tax professional before you file.
