How to Set Up Your Chart of Accounts: A Step By Step Guide for Small Businesses

Hello its Your Bookkeeper Rebekah!!  Here to talk to you today about Chart of Accounts!! Let’s jump in!

Your Chart of Accounts (COA) is the foundation of your bookkeeping system. It organizes every financial transaction your business makes into categories, making it easier to track income, expenses, assets, and liabilities. This lets the business produce accurate financial reports and make informed business decisions.

 Whether you’re a new entrepreneur or cleaning up your books, setting up your chart of accounts correctly is key to accurate financial reporting.

Here’s a step-by-step guide to setting up your chart of accounts:

1. Understand What a Chart of Accounts Is

A chart of accounts is simply a list. A comprehensive list of categories your small business uses to record transactions in the general ledger, your main record of financial transactions.

Each account has a unique code or number to help keep things organized. You can create your own accounts but let’s start with the main ones needed for every entrepreneur or small business.

The four main account types are:

• Assets – what your business owns (cash, accounts receivable, equipment, work vehicles, properties).

• Liabilities – what your business owes (loans, accounts payable, tax, sales tax, interest).

• Equity – owner’s investment and retained earnings (stock, dividends).

• Income & Expenses – money earned and money spent.

  
  

2. Start with Standard Categories

Most businesses can begin with these basic categories:

Assets

• Cash

• Accounts Receivable

• Inventory

• Equipment

Liabilities

• Accounts Payable

• Credit Cards

• Loans

Equity

• Owner’s Capital

• Retained Earnings

Income

• Sales Revenue

• Service Income

• Other Income

Expenses

• Rent

• Payroll

• Utilities

• Office Supplies

• Marketing

• Professional Fees

  
  

Keep it simple — too many categories can make reporting confusing.  But to make it more unique to your business you can make sub categories under each of the main categories to create a better snapshot of where money is coming in and going out to.

3. Number Your Accounts

Assigning numbers to your accounts keeps everything organized, especially in accounting software. A common numbering system is:

• 1000–1999: Assets

• 2000–2999: Liabilities

• 3000–3999: Equity

• 4000–4999: Income

• 5000–5999: Expenses

  
  

For example:

• 1010 – Cash

• 2010 – Accounts Payable

• 4010 – Sales Revenue

• 5010 – Office Supplies

  
  

4. Customize for Your Business

Every industry is different. A retail business may need accounts for Inventory and Cost of Goods Sold, while a service business may need accounts for Subscriptions or Contractors. Tailor your chart of accounts to fit your unique operations.

Check below for some sample examples of Chart of Accounts for different industries.

Sample COA for Resturant.pdf

Download PDF • 207KB

Sample COA for eCommerce.pdf

Download PDF • 213KB

Sample COA for Rental Properties.pdf

Download PDF • 211KB

Sample COA for Medical Office.pdf

Download PDF • 216KB

Sample COA for Construction.pdf

Download PDF • 213KB

5. Use Accounting Software

Most software (QuickBooks, Xero, Wave) comes with a preloaded chart of accounts. These often follow standard accounting principals, helping ensure your business financial statements are organized correctly.  They are not set in stone. You can still customize it to fit your business, add categories you use often, and remove ones you don’t.

6. Review and Maintain Regularly

Your chart of accounts is not “set and forget.” As your business grows, you may need to add new categories (like online ads or software tools). You should review and update it quarterly to make sure it still reflects your business.  This will help improve financial reporting accuracy, maintain compliance with tax laws and regulations and most importantly support better business decisions – making it evolve and align with your current operational realities and reporting needs provides reliable insights into your business’s financial health.

Final Thoughts

Setting up your chart of accounts the right way saves you time, reduces errors, and ensures your financial reports are accurate. A clean COA makes tax season easier and helps you make better business decisions.

Not sure how to structure your chart of accounts? I can help set up and customize a chart of accounts that fits your business and keeps your bookkeeping organized – you can never go wrong with Your Bookkeeper Rebekah ❤️

Ask Rebekah for Help

FAQ: Frequently Asked Questions About Setting Up a Chart of Accounts

1. What is the best way to categorize accounts?

Categorize accounts based on their nature:

• Assets: Anything you own that provides future economic value.

• Liabilities: Any debts or obligations owed to others.

• Equity: The owner’s share of the business.

• Revenue: Income earned from selling goods or providing services.

• Expenses: Costs incurred in the process of earning revenue.

  
  

You can create subcategories for each main category to reflect specific operations within your business.

2. Should I create subcategories for every account?

Not necessarily. Subcategories are important when:

• You have multiple sources of revenue or types of expenses.

• You need detailed reporting to track performance in different business areas.

  
  

  However, if your business is simple and your transactions are straightforward, you may not need many subcategories.

  
  

3. Can I change my Chart of Accounts later?

Yes, you can adjust your COA, but make changes with caution. Changing the account numbers or categories can impact your historical data and make financial comparisons difficult. When you make changes:

• Document them carefully.

• If using accounting software, ensure it supports COA changes and allows for backward compatibility.

• Notify your accountant or financial team of the updates.

  
  

4. How many accounts should I have?

The number of accounts in your COA depends on the complexity of your business. A small business might have just a few accounts, while a large company could have hundreds. Start simple and add more accounts as your business grows or as your financial reporting needs become more detailed.

5. Can I use accounting software to set up a COA?

Yes, most accounting software (like QuickBooks, Xero, or FreshBooks) allows you to create and manage your COA easily. These platforms often have pre-built templates based on industry standards, but you can customize them to suit your specific business needs.

6. Do I need an accountant to set up my COA?

While setting up a basic COA can be done by business owners, consulting an accountant is recommended, especially for:

• Larger businesses with complex financial needs.

• Industries with specific regulatory requirements (like medical offices or nonprofits).

• Businesses anticipating rapid growth or expansion.

  
  

An accountant can ensure that your COA is compliant with accounting standards and tax laws.

7. Should I keep my Chart of Accounts simple or detailed?

Start with a simple COA and expand it as needed. If your business is small or just starting, you likely don’t need an overly detailed structure. As you grow and your financial transactions become more complex, you can add more subaccounts to improve your reporting and tracking.

Have more questions?? Reach out to Your Bookkeeper Rebekah!  ❤️