Chart of Accounts: Definition, Guide and Examples

A chart of accounts helps organize your business’s transactions to reveal where money is coming from and going to.
Hillary Crawford
By Hillary Crawford 
Edited by Christine Aebischer

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Nerdy takeaways
  • A chart of accounts is the filing cabinet you’ll find at the heart of your accounting system.

  • It categorizes transactions into primary accounts like assets, liabilities, equity, expenses and revenue. Sub-accounts can be used to categorize transactions further.

  • Accounting software products typically come with a standard chart of accounts or let you import your own. You can work with an accountant to best modify it according to your business’s structure.

Nerdy takeaways
  • A chart of accounts is the filing cabinet you’ll find at the heart of your accounting system.

  • It categorizes transactions into primary accounts like assets, liabilities, equity, expenses and revenue. Sub-accounts can be used to categorize transactions further.

  • Accounting software products typically come with a standard chart of accounts or let you import your own. You can work with an accountant to best modify it according to your business’s structure.

What is a chart of accounts?

A chart of accounts is a list of account names used to label transactions and keep tabs on a company’s finances. Think of it as the filing cabinet for your small business’s accounting system. It organizes transactions into groups, which helps track money coming in and out of the company.

Charts of accounts should be organized with simplicity in mind. Most QuickBooks Online plans, for example, support up to 250 accounts. The average small business shouldn't have to exceed this limit if its accounts are set up efficiently.

How does a chart of accounts work?

In accounting, each transaction you record is categorized according to its account and sub-account to help keep your books organized. These accounts and sub-accounts are located in the chart of accounts, along with their balances. An expense account balance, for example, shows how much money has been spent to operate your business, whereas a liabilities account balance shows how much money your business still owes.

When you reference your chart of accounts, you might also notice a “view register” option next to an account name. This shows you a record of all of the transactions that have been associated with that account over time, making it easier for you and your accountant to spot errors and miscategorizations. Each account usually has an account number and description, too.

A typical chart of accounts has five primary accounts:

  • Assets.

  • Liabilities.

  • Equity.

  • Expenses.

  • Revenue.

Small businesses might record hundreds or thousands of transactions each year. That’s a large pool of data to sort through. These main accounts help organize transactions into coherent groups that you can use to analyze your business’s financial position. In fact, some of the most important financial reports — the balance sheet and income statement — are generated based on data from the chart of accounts’ main accounts.

Chart of accounts example

A company’s chart of accounts might include the five primary accounts, plus a range of sub-accounts for each. The more complex a business, the more accounts it likely has. The video below shows how to categorize transactions in QuickBooks Online and navigate the chart of accounts. Most charts of accounts will look structurally similar to the one shown.

Though most accounting software products set you up with a standard chart of accounts or let you import your own, it’s a good idea to have an accountant scan it and add any other accounts that are specific to your business. The video below explains how to add new accounts in Xero.

How is a chart of accounts organized?

Chart of accounts numbering

Traditionally, accountants can tell which account a transaction belongs to based on the first digit of the account number; for example, assets accounts for larger businesses are generally numbered 100 to 199 and liabilities are generally numbered 200 to 299. This helps keep books organized. Small businesses with less than 250 accounts might have a different numbering system.

Account types

Assets, liabilities and equity accounts are used to generate the balance sheet, which conveys the business’s financial health at that point in time and whether or not it owes money. Balance sheet accounts are generally listed first on the chart of accounts. Expense and revenue accounts make up something called the income statement, which provides insight into a business’s profitability overtime.

Assets: any resource your company owns that provides value. Assets may include the following.

  • Cash.

  • Accounts receivable.

  • Inventory.

  • Equipment.

  • Vehicles.

Liabilities: any debt your company owes. Liabilities may include the following.

  • Accounts payable.

  • Business loans.

  • Taxes payable.

Equity: what’s left after subtracting a company's liabilities from its assets. Equity accounts may include the following.

  • Common stock.

  • Preferred stock.

  • Retained earnings.

Revenue: the money your business brings in from the sale of its goods or services. Revenue accounts may include the following.

  • Sales.

  • Interest revenue.

Expenses: all the types of money and resources a business spends in an effort to generate revenue. To calculate net income, subtract expenses from revenue. Expense accounts may include the following.

  • Payroll.

  • Rent.

  • Travel expenses.

  • Utilities bills.

Chart of accounts best practices

Wait to delete old accounts. In the interest of not messing up your books, it’s best to wait until the end of the year to delete old accounts. Merging or renaming accounts can create headaches come tax season. However, you can add new accounts at any time.

Don’t go overboard with your accounts. Create a chart of accounts that gives you important information. That doesn’t mean recording every single detail about every single transaction. You don’t need a separate account for every product you sell, and you don’t need a separate account for each utility. Certain items can be lumped together.

Aim for consistency. Create a chart of accounts that doesn’t change much year over year. This way you can compare the performance of different accounts over time, providing valuable insight into how you are managing your business’s finances.

Prune your accounts. At the end of the year, review all of your accounts and see if there's an opportunity for consolidation. This will make handling your accounts more manageable.

Stacy Kildal, a former Fundera writer, contributed to this article.

A version of this article was first published on Fundera, a subsidiary of NerdWallet.