Chart of Accounts Explained: Setup Guide for Any Business
Your chart of accounts is the backbone of your financial system. Learn how to set one up correctly and avoid common mistakes.
By Jennifer Liu · · 11 min read
Chart of Accounts Explained: Setup Guide for Any Business
Your chart of accounts (COA) is the foundation of your entire bookkeeping system. Set it up right from the start, and everything else becomes easier.
What is a Chart of Accounts?
A chart of accounts is an organized list of every account used to record financial transactions. Think of it as a filing system for your money.
Each account has:
- Account number: For organization
- Account name: Descriptive title
- Account type: Asset, liability, equity, revenue, or expense
Why Your COA Matters
Organization
Transactions go into the right "buckets" consistently.
Reporting
Your financial statements depend on proper categorization.
Tax Preparation
Good categorization = easier tax filing + maximum deductions.
Analysis
Compare performance across periods and find trends.
The Five Main Account Categories
1. Assets (1000-1999)
What your business owns:
- Current assets: Cash, receivables, inventory (liquid, <1 year)
- Fixed assets: Equipment, vehicles, property (long-term)
- Other assets: Deposits, intangibles
2. Liabilities (2000-2999)
What your business owes:
- Current liabilities: Payables, short-term debt (<1 year)
- Long-term liabilities: Loans, mortgages (>1 year)
3. Equity (3000-3999)
Owner's stake:
- Owner's investment
- Retained earnings
- Distributions
4. Revenue (4000-4999)
Money coming in:
- Product sales
- Service income
- Other revenue
5. Expenses (5000-9999)
Money going out:
- Cost of goods sold (5000s)
- Operating expenses (6000s-7000s)
- Other expenses (8000s)
Standard Chart of Accounts Template
Assets
| Number | Account Name |
|---|---|
| 1010 | Checking Account |
| 1020 | Savings Account |
| 1100 | Accounts Receivable |
| 1200 | Inventory |
| 1300 | Prepaid Expenses |
| 1500 | Equipment |
| 1510 | Accumulated Depreciation |
Liabilities
| Number | Account Name |
|---|---|
| 2010 | Accounts Payable |
| 2020 | Credit Card Payable |
| 2100 | Payroll Liabilities |
| 2200 | Sales Tax Payable |
| 2500 | Long-term Loan |
Equity
| Number | Account Name |
|---|---|
| 3010 | Owner's Equity |
| 3020 | Owner's Draws |
| 3100 | Retained Earnings |
Revenue
| Number | Account Name |
|---|---|
| 4010 | Product Sales |
| 4020 | Service Revenue |
| 4030 | Consulting Income |
| 4900 | Other Income |
Cost of Goods Sold
| Number | Account Name |
|---|---|
| 5010 | Purchases |
| 5020 | Freight/Shipping Costs |
| 5030 | Subcontractor Costs |
Operating Expenses
| Number | Account Name |
|---|---|
| 6010 | Advertising & Marketing |
| 6020 | Bank Fees |
| 6030 | Contractor Expenses |
| 6040 | Insurance |
| 6050 | Office Supplies |
| 6060 | Professional Services |
| 6070 | Rent/Lease |
| 6080 | Software & Subscriptions |
| 6090 | Telephone & Internet |
| 6100 | Travel |
| 6110 | Utilities |
| 6120 | Meals & Entertainment |
| 6200 | Payroll Expenses |
| 6210 | Payroll Taxes |
| 6300 | Depreciation |
| 7000 | Interest Expense |
Industry-Specific Accounts
Retail/E-commerce
- Merchant Processing Fees
- Returns & Refunds
- Inventory Shrinkage
- Shipping Supplies
Service Business
- Project Materials
- Subcontractor Costs
- Professional Development
- Travel & Mileage
Restaurant
- Food Costs
- Beverage Costs
- Kitchen Supplies
- Linens & Uniforms
Construction
- Job Materials
- Equipment Rental
- Permits & Licenses
- Workers Compensation
Best Practices
1. Start Simple
Begin with essential accounts. You can always add more later.
2. Use Consistent Numbering
Leave gaps in numbering for future accounts:
- 1010, 1020, 1030... not 1, 2, 3
3. Be Specific Enough (But Not Too Specific)
Good: "Marketing - Digital Ads" Too vague: "Marketing" Too detailed: "Facebook Ads Q1 Campaign"
4. Think About Taxes
Create accounts that align with tax categories:
- Office Supplies (deductible)
- Meals & Entertainment (50% deductible)
- Vehicle Expenses (mileage or actual)
5. Review Annually
Adjust as your business evolves.
Common Mistakes
Too Many Accounts
Don't create a separate account for every vendor. Use sub-accounts or tags instead.
Too Few Accounts
Lumping everything into "Miscellaneous Expense" makes analysis impossible.
Inconsistent Naming
Pick a convention and stick with it:
- "Marketing - Social Media" ✓
- "Social Media Marketing" ✗
Ignoring the Numbering System
Random numbers make navigation difficult.
Setting Up in Ledger Flow
- Start with templates: We offer industry-specific charts of accounts
- Customize as needed: Add, rename, or remove accounts
- Set up rules: AI learns to categorize transactions correctly
- Review suggestions: Accept or modify AI categorization
Migrating from Another System
If you're switching software:
- Export your existing chart of accounts
- Map accounts to your new structure
- Ensure historical data transfers correctly
- Verify opening balances
Action Items
Today: ☐ Review this template against your current accounts ☐ Identify gaps or unnecessary accounts
This Week: ☐ Set up or refine your chart of accounts ☐ Document any custom accounts and their purposes
Ongoing: ☐ Review quarterly for needed changes ☐ Train team on proper account usage
A well-organized chart of accounts is the first step to financial clarity. Get it right, and everything else follows.