The accounting software market will expand from $19.74 billion in 2024 to $30.66 billion by 2029, with a 9.20% CAGR. These numbers tell an interesting story.

A chart of accounts for small business goes beyond being just another accounting tool. It is the foundation of your entire financial system. This structured index of all financial accounts in your company’s general ledger helps categorize and track every transaction systematically.

Small businesses need properly organized accounts to analyze finances and make informed decisions. Your small business might only need about 20 accounts to manage finances effectively, while large enterprises often use hundreds of different accounts.

This piece walks you through everything about creating and organizing a chart of accounts specifically tailored for small businesses. We’ve included a free template to help you start right away. You’ll learn about the five core account types and set up a practical system that grows with your business.

What is a Chart of Accounts and Why It Matters

A chart of accounts (COA) isn’t just a list of financial categories—it’s the beating heart of your accounting system. Your company’s general ledger has a structured list of all financial accounts ^[1]. This financial blueprint shows where every dollar comes from and goes to ^[2].

The COA works as a tool that groups all your business financial transactions during specific accounting periods ^[3]. Your COA entries come with a unique identifier (usually a number), a clear name, and brief notes that help you find information fast ^[3]. This layout turns complex financial data into clear, organized information.

Small businesses typically use these five main account types in their chart of accounts:

1. Assets: Everything your business owns or is owed (cash, inventory, equipment)
2. Liabilities: What your business owns to others (loans, accounts payable)
3. Equity: Owner’s interest in the business (retained earnings, capital)
4. Revenue: Income generated from business activities
5. Expenses: Costs incurred to generate revenue

This grouping matches your main financial statements’ structure. Your balance sheet shows the first three categories (assets, liabilities, and equity), while your income statement displays revenue and expenses ^[4].

A well-laid-out chart of accounts brings many benefits that affect your business success. It will give a precise and consistent financial report, which you need to check your company’s financial health ^[1]. Good financial data helps you make smart choices about daily operations and growth plans.

On top of that, a good COA helps your business follow financial reporting rules and makes audits easier by showing clear financial trails ^[1]. Small businesses that face tax audits or need loans will find this organization saves them lots of trouble.

Running your small business finances without a chart of accounts would be messy and full of mistakes. One accounting expert says a COA gives “a birds-eye view of every area of your business that spends or makes money” ^[5]. This detailed view helps you spot where money comes from and goes, so you can plan better ^[1].

The UK loses more than £137 billion to fraud each year ^[3]. A well-organized chart of accounts protects your business by creating clear records that show problems right away. You can catch issues before they grow serious.

Your daily operations benefit from a chart of accounts too. A good structure speeds up your accounting tasks, making it easy to record transactions, create reports, and review your books ^[6]. Small business owners save valuable time and money this way.

Your chart of accounts can adapt to fit your business needs ^[3]. The five main categories stay the same, but you can add subcategories that match your operations. To name just one example, retail businesses might need detailed inventory accounts, while service companies focus more on various income streams.

Your chart of accounts works like a filing system and map for business finances ^[2]. It keeps past transactions organized and helps guide you toward future goals. Most small businesses do well with about 20 accounts, but this number grows with your company ^[5].

Small business owners who don’t have much financial training find a well-laid-out chart of accounts helps them understand complex finances. It turns raw numbers into useful insights that lead to better business choices and higher profits.

Understanding the 5 Core Account Types

Five fundamental account types make up a small business’s chart of accounts. Each type plays a unique role to track your financial activities and shows your company’s financial position. Let’s get into these core account types in detail.

Assets

Your business’s assets are everything that provides value ^[7]. These resources have monetary worth and can be converted into cash ^[5]. Small business assets come in two categories: current assets (quick to convert to cash) and non-current assets (long-term holdings) ^[8].

Common small business assets include:

• Cash and bank accounts
• Accounts receivable (money owed by customers)
• Inventory and supplies
• Equipment, furniture, and vehicles
• Land and buildings
• Prepaid expenses like insurance or rent ^[7]

Asset accounts in your chart typically start with identification numbers beginning with 1 (such as 1000-1099) ^[7]. Whatever your business type, tracking assets properly is significant since they represent your company’s economic resources.

Liabilities

Liabilities include all debts and obligations your business owes to others ^[5]. Creditors and outside parties have claims against your assets through these liabilities. Similar to assets, you can split liabilities into current (due within one year) or non-current (long-term obligations) ^[8].

Typical liability accounts include:

• Accounts payable (bills you need to pay)
• Loans payable (short and long-term)
• Accrued expenses
• Payroll liabilities
• Sales taxes payable
• Unearned revenue (payments received before delivering services) ^[7]

Liability accounts usually start with 2 (for example, 2000-2900) ^[7]. Good liability tracking helps you understand your debt position and manage payment obligations.

Equity

Equity shows the owner’s stake in the business after subtracting liabilities from assets ^[5]. Keep in mind that equity accounts vary based on your business structure. Sole proprietorships and partnerships use capital accounts to record owner investments and withdrawals. Corporations track common stock and retained earnings ^[9].

The simple equation that drives equity is: Equity = Assets – Liabilities ^[5]

Equity accounts typically start with 3 (such as 3000-3900) ^[7] and cover items like owner’s equity, retained earnings, and various stock accounts based on your business structure.

Revenue

Revenue tracks all income your business makes through its main activities ^[5]. Many small businesses start with just a few revenue accounts, but add more detailed categories as they grow.

Common revenue accounts include:

• Sales revenue (from core products or services)
• Service revenue
• Interest income
• Rental income
• Commission income ^[7]

Revenue accounts begin with 4 (4000-4900) ^[7]. Good revenue categorization shows which activities bring in the most income.

Expenses

Expenses track all costs of running your business ^[5]. Of course, these accounts show where your money goes and highlight areas where you might cut costs.

Main expense accounts often include:

• Cost of goods sold
• Salaries and wages
• Rent and utilities
• Marketing and advertising
• Office supplies
• Insurance
• Professional fees
• Depreciation ^[7]

Expense accounts start with 5 (5000-5900) ^[7], though some systems use up to 7XXX for various expense categories ^[3].

These five core account types are the foundations of creating a chart of accounts for your small business. They provide the structure for all financial reporting and help organize transactions logically. A focus on these core categories with appropriate sub-accounts will give you the financial clarity you need for smart business decisions, unless your business has unusual complexity.

How to Create a Chart of Accounts for Small Business

Small businesses can easily create a solid chart of accounts. A well-laid-out approach helps you build a financial framework that grows with your company and shows your business’s health clearly. Let’s make this process simple.

1. List your business activities

A good chart of accounts starts with identifying all your company’s financial activities. Write down every way your business makes and spends money. Look at your revenue streams, expense categories, and assets you own or plan to buy. Think about both your current operations and future growth plans.

Service businesses should focus on their service offerings. Retail operations need to look at product lines and sales channels. Manufacturing companies must track production costs, raw materials, and finished goods inventory. This list becomes the foundation of your financial system.

2. Group transactions into categories

After listing your activities, put them into five major account types: assets, liabilities, equity, revenue, and expenses. Group similar transactions together within these categories. You might group marketing, office supplies, and professional fees under expenses.

Your business model should shape this grouping. As one accounting expert notes, “The grouping and structure of a COA should be aligned to the business model to enable statutory and reporting requirements” ^[10]. Structure your groups based on how you’ll analyze your finances—by department, project, or region.

3. Assign account numbers

A logical numbering system makes your chart of accounts easy to use. Most businesses follow this coding structure:

• Assets begin with 1 (1000-1999)
• Liabilities begin with 2 (2000-2999)
• Equity accounts begin with 3 (3000-3999)
• Revenue accounts begin with 4 (4000-4999)
• Expense accounts begin with 5 (5000-5999) ^[2]

Complex businesses might add department codes. “03-07-550” could show travel expenses (550) for the engineering department (07) in a specific subsidiary (03) ^[2].

4. Use clear and consistent naming

Account names should tell their purpose at a glance. Simple terms work better than technical jargon. Your team needs to understand these names easily.

“Use simple, easy-to-understand naming conventions,” says one financial expert ^[11]. Clear naming becomes crucial as your business grows and more people work with your financial data. Brief descriptions for each account can help explain their purpose better.

5. Add sub-accounts if needed

Sub-accounts give more detail without making your main chart messy. Many accounting systems let you create up to five levels of sub-accounts under one parent account ^[12].

These sub-accounts help break down broad categories. Marketing expenses could split into digital advertising, print media, and event sponsorships. You’ll get deeper insights while keeping your primary chart clean.

6. Review and refine regularly

Your chart of accounts must grow with your business. Check it every quarter or year to see if it still works for you. Add new accounts as needed, but remember this rule: “Feel free to add accounts at any time of the year, but wait until the end of the year to delete old accounts” ^[13].

Removing accounts mid-year can mess up your financial reporting and year-over-year comparisons. Make obsolete accounts inactive until year-end, when you can safely remove or combine them.

Chart of Accounts Example for Small Business

Real-world examples help us understand how a chart of accounts works in practice. Let’s get into a practical framework that small businesses can adapt to their needs.

Sample layout with account codes

Small businesses typically use a numbering system where the first digit shows the account type. Assets begin with 1, liabilities with 2, equity with 3, revenue with 4, and expenses with 5 ^[14]. This well-laid-out approach makes navigation and reporting easier.

A retail business might use this basic chart of accounts:

Assets (1000-1999)

• 1000 Cash
• 1020 Accounts Receivable
• 1040 Inventory
• 1060 Equipment

Liabilities (2000-2999)

• 2000 Accounts Payable
• 2020 Short-Term Loans Payable
• 2030 Long-Term Loans Payable

Equity (3000-3999)

• 3000 Owner’s Equity
• 3100 Retained Earnings

Revenue (4000-4999)

• 4000 Sales Revenue
• 4020 Service Revenue

Expenses (5000-5999)

• 5000 Cost of Goods Sold
• 5010 Rent Expense
• 5020 Utilities Expense
• 5030 Salary Expense ^[15]

This numbering system leaves room to grow within each category. To name just one example, you could split your inventory account (1040) into sub-accounts like Raw Materials (1041), Work-in-Progress (1042), and Finished Goods (1043) ^[16]. Your chart becomes more detailed while keeping its organizational structure.

Balance sheet vs income statement accounts

Knowing which accounts belong on which financial statement is vital for proper financial management. Your chart of accounts directly supports the creation of your main financial reports.

Balance sheet accounts include:

• Assets: Your business’s resources (cash, inventory, equipment)
• Liabilities: What you owe to others (accounts payable, loans)
• Equity: Owner’s stake in the business (owner’s equity, retained earnings) ^[17]

Income statement accounts consist of:

• Revenue: Income from sales and services
• Expenses: Costs from operating your business ^[18]

These two account types serve different purposes. Balance sheet accounts show your company’s assets, debts, and net worth at a specific moment. Income statement accounts track income and expenses over time, revealing whether you operate at a profit or loss ^[18].

The sort of thing I love about distinguishing between these account types is how it simplifies financial statement preparation and business performance analysis.

How many accounts should you have?

Your business’s complexity and information needs determine the ideal number of accounts. In spite of that, one principle stands out: balance detail with manageability.

Organizations with efficient charts typically have 180 or fewer accounts, while others might use 680 or more ^[1]. Most small businesses benefit from staying on the lower end of this range.

Small business charts usually include about 20 accounts, though larger enterprises might need hundreds ^[7]. No “perfect” number exists, but an oversized chart complicates reporting and reconciliations and might increase accounting costs ^[1].

Think over these factors when choosing your account number:

1. Your business complexity
2. Industry-specific requirements
3. Detail level needed for decision-making
4. Tax reporting requirements

The temptation to create detailed accounts is strong, but you can always add accounts as your business grows. Starting with a simplified chart helps you avoid the common problem of having too many unused accounts that complicate financial management.

Best Practices for Organizing Your Chart of Accounts

Your small business’s chart of accounts needs more than just the original setup. We needed ongoing attention and organizational best practices to keep your financial system useful and efficient.

Avoid overcomplicating your chart

A cluttered COA creates more problems than it solves. Research shows businesses with lean charts typically have 180 or fewer accounts, while complicated systems balloon to 680+ accounts ^[10]. Your team members often make coding errors and mismanage funds if your chart becomes overwhelmed with hundreds of specific accounts ^[19].

Here are the benefits you get from simplification:

• Reduced coding errors and reconciliation time
• Improved clarity for non-accountants
• Lower audit costs because auditors spend less time reviewing accounts ^[20]

You should add accounts only if they deliver meaningful reporting benefits. Ask yourself: “Will this account get used enough to be worth it?” ^[21]. Unite accounts that have small balances or similar transactions instead of creating separate entries for every minor expense category.

Use sub-accounts wisely

QuickBooks Online and similar platforms let you create up to five sub-account levels under one parent account ^[22]. You should use this feature carefully. Sub-accounts work best to group similar accounts together under their respective categories, which makes financial tracking easier to manage ^[23].

To name just one example, see “Marketing Expenses,” where you might have sub-accounts for digital advertising, public relations, and content creation. Creating further subdivisions might add unnecessary complexity ^[21].

Keep it consistent year over year

Your chart of accounts should stay stable over time. The Financial Accounting Standards Board (FASB) and GAAP guidelines stress that COAs should remain consistent to compare periods accurately ^[6].

Frequent changes to account structures make year-over-year analysis impossible and confuse stakeholders. A consistent structure helps you track performance trends accurately and builds stakeholder confidence in your financial reporting.

Don’t delete accounts mid-year

You might want to clean up unused accounts, but wait until year-end after closing your books ^[3]. Mid-year account deletions complicate financial analysis and create reporting inconsistencies.

These changes can make tax season more complex because you’ll need to track transactions across both old and new account names ^[3]. A better approach is to make obsolete accounts inactive until you can remove them properly after your annual close.

These best practices help you maintain a chart of accounts that gives clear financial insights without becoming an administrative burden.

Free Chart of Accounts Template and How to Use It

Here’s a free chart of accounts template you can download and use right away. This resource will save you time and give you accounting best practices tailored for small businesses.

What’s in the template

The template offers a well-laid-out foundation for your financial organization system. It has:

• Account codes and numbering system arranged in the standard format (assets starting with 1, liabilities with 2, etc.)
• Account titles with clear, descriptive names
• Account type indicators showing whether each account normally increases with a debit or credit entry
• Account descriptions explaining each account’s purpose
• Categorization by financial report (balance sheet or income statement) ^[4]

Your accounts are organized by category, which makes finding specific accounts easier during transaction recording. The structure follows standard accounting practices while staying flexible enough for customization.

How to customize it for your business

You can easily customize the template based on your needs:

1. Add your business name to personalize the document
2. Adjust account names that match your operations
3. Add or remove accounts based on your activities
4. Modify descriptions that clarify each account’s purpose
5. Think over industry-specific requirements

We designed this template to help you track financial activities that matter most to your business’s finances ^[24]. You can maintain consistency with standard accounting principles while adapting to your unique operational needs.

Where to download the template

The template is ready for download on this page. Click below to get instant access to the Excel file ^[25].

The template comes in several industry-specific versions, including options for:

• Construction and contractors
• Nonprofit organizations
• Law firms
• Hospitality businesses
• Financial services ^[26]

Download your template now to organize your finances better and learn about your business performance.

Conclusion

Why Your Chart of Accounts Matters More Than You Think

A proper chart of accounts is the life-blood of financial success for any small business. This piece explores everything from the five core account types to best practices that keep your financial framework optimized.

Your chart of accounts does more than just sort transactions. It revolutionizes raw financial data into meaningful insights that optimize business decisions. Assets, liabilities, equity, revenue, and expenses create the foundation for your entire financial reporting system.

Small businesses face unique challenges with financial information organization. Your chart of accounts must balance detail with manageability. Most small businesses work well with around 20 accounts, though this number grows as your company expands.

Our free template gives you a solid starting point and saves valuable time while giving your financial structure alignment with accounting best practices. You can customize it to match your industry’s needs without compromising standard accounting principles.

Your chart of accounts needs consistent maintenance. Make strategic changes at year-end to preserve accurate year-over-year comparisons. This disciplined approach will keep your financial reporting reliable and comparable across accounting periods.

Financial clarity ended up leading to better business performance. A well-implemented chart of accounts reveals patterns, emphasizes areas to improve, and guides strategic planning. This financial organization helps you spot issues early while identifying growth opportunities.

Time spent creating a thoughtful chart of accounts rewards you with simpler tax preparation, optimized audits, and improved financial analysis. Start with our framework, adapt it to your business needs, and see how financial clarity changes your decision-making process.

FAQs

Q1. What are the main components of a chart of accounts for small businesses? A chart of accounts for small businesses typically includes five core account types: assets, liabilities, equity, revenue, and expenses. These categories help organize financial transactions and form the basis for financial reporting.

Q2. How many accounts should a small business have in its chart of accounts? Most small businesses can operate effectively with around 20 accounts. However, the ideal number may vary based on the business’s complexity, industry requirements, and information needs. It’s important to balance detail with manageability.

Q3. What are some best practices for organizing a chart of accounts? Key best practices include avoiding overcomplication, using sub-accounts wisely, maintaining consistency year-over-year, and refraining from deleting accounts mid-year. These practices help ensure clear financial insights without creating an administrative burden.

Q4. How can I customize a chart of accounts template for my business? To customize a chart of accounts template, start by adding your business name, adjusting account names to reflect your operations, adding or removing accounts based on your activities, modifying descriptions for clarity, and considering any industry-specific requirements.

Q5. Why is a well-structured chart of accounts important for small businesses? A well-structured chart of accounts is crucial for small businesses as it provides financial clarity, simplifies tax preparation and audits, enables accurate financial analysis, and supports informed decision-making. It helps transform raw financial data into meaningful insights that drive business success.

References

[1] – https://www.cfo.com/news/is-your-chart-of-accounts-too-long-metric-of-the-month/654539/
[2] – https://www.accountingtools.com/articles/chart-of-accounts-numbering.html
[3] – https://www.cubesoftware.com/blog/chart-of-accounts
[4] – https://www.smartsheet.com/sites/default/files/2022-04/IC-Chart-of-Accounts-11306.xlsx?srsltid=AfmBOop0Ucj0jSFoThmlXCGetFRFIZeUTt23pnvEtthxVQQz7gkjbS4a
[5] – https://www.freshbooks.com/hub/accounting/chart-of-accounts
[6] – https://www.investopedia.com/terms/c/chart-accounts.asp
[7] – https://www.pacificabs.com/knowledge-center/blog/small-business-accounting-essential-chart-of-accounts-every-owner-should-know/
[8] – https://www.netsuite.com/portal/resource/articles/accounting/chart-of-accounts.shtml
[9] – https://courses.lumenlearning.com/suny-finaccounting/chapter/assets-liabilities-and-owners-equity/
[10] – https://www.deloitte.com/us/en/services/consulting/articles/chart-of-accounts-design.html
[11] – https://millercooper.com/chart-a-course-for-success-with-a-detailed-chart-of-accounts/
[12] – https://quickbooks.intuit.com/learn-support/en-uk/help-article/chart-accounts/create-subaccounts-chart-accounts-quickbooks/L7NLrY7cd_GB_en_GB
[13] – https://www.bench.co/blog/accounting/chart-of-accounts
[14] – https://www.accountingcoach.com/chart-of-accounts/explanation
[15] – https://www.foodbevy.com/what-is-a-chart-of-accounts-coa-for-a-small-business/
[16] – https://vencru.com/blog/sample-chart-of-accounts-for-small-business/
[17] – https://www.accountingcoach.com/blog/transaction-income-statement-balance-sheet-account
[18] – https://www.freshbooks.com/hub/reports/balance-sheet-vs-income-statement?srsltid=AfmBOoqftDZAuhJENKD8PLE5KeJYJj89RJDZxC2sxjh0o3hSNucZ0iFS
[19] – https://www.bakertilly.com/insights/simplify-your-chart-of-accounts-to-drive-missional-growth
[20] – https://www.accountingtools.com/articles/reduce-the-chart-of-accounts
[21] – https://ramp.com/blog/six-tips-for-optimizing-your-chart-of-accounts
[22] – https://quickbooks.intuit.com/learn-support/en-us/account-management/effective-use-of-subaccounts-inthe-chart-of-accounts/00/1397824
[23] – https://www.suvit.io/post/organize-chart-of-accounts
[24] – https://quickbooks.intuit.com/oidam/intuit/sbseg/en_us/Blog/Downloadable-assset/Template/Excel-Accounting-Template.xlsx
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[26] – https://www.firmofthefuture.com/accounting/create-31-industry-specific-charts-of-accounts-in-quickbooks/