A chart of accounts is the list of every category your business uses to record money coming in and going out. Each transaction in your books, from a sale to a utility bill, is assigned to one account on that list. Your profit and loss statement and balance sheet are simply those accounts added up.
When the chart of accounts is set up well, your reports tell you what's really happening in the business. When it isn't, you get reports full of "Miscellaneous" and "Uncategorized" that nobody can use. In 38 years of accounting, I've found that fixing the chart of accounts is often the first step to fixing a messy set of books.
What a chart of accounts does in accounting
Think of it as the filing system for your books. It decides:
- Where each transaction is recorded
- How your profit and loss statement and balance sheet are organized
- What questions your reports can answer, such as which sales channel or location makes the most money
- How easily your tax preparer can find the numbers they need
Every accounting program, including QuickBooks Online, starts you off with a standard chart of accounts. It's a reasonable starting point, but it was built for a generic business, and you'll want to change it to match how yours sells.
The five types of accounts
Every chart of accounts is built from the same five types. The first three make up the balance sheet; the last two make up the profit and loss statement.
| Account type | What it tracks | Examples |
|---|---|---|
| Assets | What the business owns | Checking account, inventory, accounts receivable, equipment |
| Liabilities | What the business owes | Credit cards, loans, sales tax payable, payroll taxes payable |
| Equity | The owner's stake in the business | Owner contributions, owner draws, retained earnings |
| Income | Money earned from sales | Food sales, service revenue, online sales |
| Expenses | Costs of running the business | Cost of goods sold, rent, payroll, utilities, insurance |
Many businesses also split expenses into two groups: cost of goods sold, which is the direct cost of what you sell, and operating expenses, which are everything else. That split is what lets you see your gross profit.
How account numbers work
Most charts of accounts give each account a number, grouped by type. A common pattern is:
| Number range | Account type |
|---|---|
| 1000 to 1999 | Assets |
| 2000 to 2999 | Liabilities |
| 3000 to 3999 | Equity |
| 4000 to 4999 | Income |
| 5000 to 5999 | Cost of goods sold |
| 6000 to 7999 | Operating expenses |
Numbers keep accounts in a sensible order on your reports and leave room to add new ones later. QuickBooks Online has a setting to turn account numbers on, and it is worth doing.
A sample chart of accounts for a restaurant
I've kept books for restaurants, hotels, gas stations and real estate companies, and each needs a different chart of accounts. Here is a simplified version of one I'd set up for a small restaurant:
| Number | Account | Type |
|---|---|---|
| 1010 | Business checking | Asset |
| 1200 | Food and beverage inventory | Asset |
| 1500 | Kitchen equipment | Asset |
| 2010 | Business credit card | Liability |
| 2200 | Sales tax payable | Liability |
| 2300 | Payroll taxes payable | Liability |
| 3010 | Owner contributions | Equity |
| 3020 | Owner draws | Equity |
| 4010 | Food sales | Income |
| 4020 | Beverage sales | Income |
| 4030 | Catering sales | Income |
| 5010 | Food cost | Cost of goods sold |
| 5020 | Beverage cost | Cost of goods sold |
| 6010 | Kitchen and server wages | Expense |
| 6100 | Rent | Expense |
| 6200 | Utilities | Expense |
| 6300 | Card processing fees | Expense |
| 6400 | Repairs and maintenance | Expense |
Splitting food and beverage sales, and their matching costs, lets the owner see food cost and beverage cost as a percentage of sales every month. That's the number that tells a restaurant owner whether menu prices and portions are working. A generic chart of accounts would lump it all together.
How to set up your chart of accounts
- Start from your software's default list rather than from scratch.
- Split income the way you want to see it, by sales channel, location or service line.
- Split cost of goods sold to match your income accounts, so you can see the margin on each.
- Delete or deactivate accounts you'll never use.
- Add liability accounts for sales tax and payroll taxes if you collect them.
- Turn on account numbers and group accounts by type.
- Review it with your tax preparer, so your accounts line up with the tax return.
Keep it lean. Every account should answer a question you actually ask. For a fuller walkthrough of setting up the books, including banking, software and a monthly routine, see my guide on how to set up an accounting system.
Common chart of accounts mistakes
- Too many accounts, so transactions end up spread across near-duplicates
- Too few accounts, so everything lands in a handful of broad categories
- Using "Miscellaneous" or "Ask my accountant" as a permanent home
- Recording sales tax collected as income instead of a liability
- Recording owner draws as an expense
- Renaming accounts in the middle of the year, which makes reports hard to compare
If your books have some of these problems, a catch-up and cleanup usually starts with restructuring the chart of accounts and reclassifying past transactions.
Need a chart of accounts built for your business?
I build a chart of accounts around how each client actually sells, as part of a full accounting setup, working online with small businesses from Weatherford, Texas. See my accounting system setup service or book a short intro call.