What Is a Chart of Accounts?
The Chart of Accounts (COA) is the complete list of every account a business uses to record transactions. Think of it as the table of contents for the entire bookkeeping system. Every dollar that enters or leaves the business gets sorted into one of these accounts.
The Five Account Categories
Every account in a COA falls into one of five categories. These categories map directly to the financial statements:
| Category | What It Tracks | Financial Statement |
|---|---|---|
| Assets | What the business owns (cash, equipment, inventory) | Balance Sheet |
| Liabilities | What the business owes (loans, payables, taxes) | Balance Sheet |
| Equity | Owner's stake in the business (capital, draws, retained earnings) | Balance Sheet |
| Revenue | Money earned from business activities (sales, fees, interest) | Income Statement |
| Expenses | Costs of running the business (rent, wages, utilities) | Income Statement |
The Numbering System
Accounts are organized using a numbering system that groups them by category. The standard ranges are:
| Number Range | Category | Typical Accounts |
|---|---|---|
| 1000–1999 | Assets | Cash, Accounts Receivable, Inventory, Equipment |
| 2000–2999 | Liabilities | Accounts Payable, Loans Payable, Sales Tax Payable |
| 3000–3999 | Equity | Owner's Capital, Retained Earnings, Owner's Draws |
| 4000–4999 | Revenue | Sales Revenue, Service Revenue, Interest Income |
| 5000–5999 | Expenses | Cost of Goods Sold, Rent, Wages, Utilities |
Within each range, you can use sub-numbers to keep related accounts together. For example, 1010 for Cash — Checking, 1020 for Cash — Savings, 1100 for Accounts Receivable, 1200 for Inventory, and so on.
QuickBooks Online Tip
QBO assigns account numbers automatically, but you can customize them. Go to Settings → Account and Settings → Advanced → Enable account numbers. Then edit each account in the Chart of Accounts screen.
Setting Up a COA for Different Business Types
A COA should reflect how the business actually operates. Here's how the categories shift depending on the business model:
Retail Business: Needs detailed inventory accounts (Inventory — Finished Goods, Inventory — Shipping Supplies), Cost of Goods Sold accounts broken down by product line, and a Sales Returns and Allowances account. Revenue is split by sales channel if the business sells in-store and online.
Service Business: Simpler COA because there's no physical inventory. Revenue accounts are split by service type (Consulting Revenue, Installation Revenue, Maintenance Revenue). Expenses focus on labor — Wages, Contractor Fees, and Professional Fees are typically the largest line items.
Restaurant: Needs detailed COGS accounts (Food Cost, Beverage Cost, Paper Goods), payroll accounts split by role (Kitchen Wages, Front of House Wages, Management Salary), and revenue split by meal period (Breakfast Revenue, Lunch Revenue, Dinner Revenue, Catering Revenue).
Keep it simple
Start with fewer accounts and add more as needed. A COA with 20 well-chosen accounts is far easier to manage than one with 80 accounts that the owner never uses. You can always add accounts — removing them is harder once transactions are posted.
Common Mistakes When Setting Up a COA
- Too many accounts: Creating a separate account for every tiny expense. "Office Supplies — Paper" and "Office Supplies — Pens" should just be "Office Supplies."
- Too few accounts: Putting everything into one "Miscellaneous Expense" account. If you can't tell what was spent, the account is useless for management.
- Mixing personal and business: The owner's personal expenses should never appear in the business COA. Keep them separate from day one.
- Inconsistent naming: Using "Rent" in one month and "Building Lease" the next. Pick a name and stick with it so reports are comparable.
- No account numbers: Relying on alphabetical sorting alone makes it harder to spot missing accounts and creates inconsistencies when accounts are renamed.
Sample Chart of Accounts — Small Bakery
Here is a complete, ready-to-use Chart of Accounts for a small bakery. This is the bakery we'll follow through all of Chapter 1's topics, so the numbers will connect to the Balance Sheet, Income Statement, and Cash Flow Statement we build later.
| Account No. | Account Name | Type |
|---|---|---|
| 1010 | Cash — Checking Account | Asset |
| 1020 | Cash — Savings Account | Asset |
| 1100 | Accounts Receivable | Asset |
| 1200 | Inventory — Raw Materials (Flour, Sugar, etc.) | Asset |
| 1250 | Inventory — Finished Goods (Baked Products) | Asset |
| 1500 | Equipment (Ovens, Mixers, Display Cases) | Asset |
| 1510 | Accumulated Depreciation — Equipment | Asset (Contra) |
| 2000 | Accounts Payable | Liability |
| 2100 | Sales Tax Payable | Liability |
| 2200 | Short-Term Loan Payable | Liability |
| 3000 | Owner's Capital | Equity |
| 3100 | Retained Earnings | Equity |
| 3200 | Owner's Draws | Equity (Contra) |
| 4000 | Sales Revenue — Retail | Revenue |
| 4100 | Sales Revenue — Wholesale / Catering | Revenue |
| 5000 | Cost of Goods Sold — Ingredients | Expense |
| 5100 | Cost of Goods Sold — Packaging | Expense |
| 5200 | Cost of Goods Sold — Direct Labor | Expense |
| 6000 | Rent Expense | Expense |
| 6100 | Utilities Expense | Expense |
| 6200 | Wages Expense — Staff | Expense |
| 6300 | Marketing and Advertising | Expense |
| 6400 | Insurance Expense | Expense |
| 6500 | Depreciation Expense | Expense |
| 6900 | Miscellaneous Expense | Expense |
Why this works
Notice how the numbering groups related accounts together. All cash accounts start with 10, all inventory with 12, all COGS with 5, and all operating expenses with 6. This makes reports cleaner and helps you find accounts quickly.