Understanding Your Chart of Accounts

A Beginner’s Guide for Small Businesses

If you’ve ever opened QuickBooks or talked to your accountant and heard the term Chart of Accounts (CoA), you may have wondered, “What the heck is that, and why do I need one?”

The Chart of Accounts is the foundation of your bookkeeping. It’s how you organize and track your business’s money. Without a clear, well-organized COA, your reports will be messy, tax time will be stressful, and you won’t have an accurate picture of how your business is really doing.

What Is a Chart of Accounts?

Think of your Chart of Accounts as the master list of all the “buckets” where your money goes. Every time you make a sale, pay a bill, buy supplies, or take a loan, that transaction gets assigned to one of these buckets (accounts).

Your CoA is divided into categories, which makes it easier to understand where your money is coming from and where it’s going.

At its simplest, a Chart of Accounts has five main sections:

1. Assets – What you own

2. Liabilities – What you owe

3. Equity – The value of the business (owner’s stake)

4. Income (Revenue) – Money coming in

5. Expenses – Money going out

The Five Core Account Types Explained

Here’s a closer look at each category, with simple examples for small businesses.

1. Assets – What You Own

These are the things your business owns that have value.
Examples:

• Cash in your checking account

• Accounts receivable (money customers owe you)

• Equipment like laptops or tools

• Inventory (if you sell products)

In QuickBooks, you’ll often see sub-accounts like:

• 1000 – Checking Account

• 1050 – Savings Account

• 1200 – Accounts Receivable

• 1500 – Computers & Equipment

2. Liabilities – What You Owe

These are your debts and obligations.
Examples:

• Credit card balances

• Loans for equipment or vehicles

• Payroll taxes you’ve collected but haven’t paid yet

Common sub-accounts include:

• 2000 – Credit Card Payable

• 2100 – Loan Payable

• 2200 – Payroll Liabilities

3. Equity – Your Business Value

Equity represents the owner’s stake in the business. It’s basically assets minus liabilities. For small businesses, this section usually includes:

• Owner contributions (money you put into the business)

• Owner draws (money you take out of the business)

• Retained earnings (profits rolled over from previous years)

Typical accounts:

• 3000 – Owner’s Equity

• 3100 – Owner Contributions

• 3200 – Owner Draws

4. Income – Money Coming In

This is how your business earns money.
It’s essential to separate your income streams so you can identify the areas of your business that are most profitable.

Examples:

• Product sales

• Service fees

• Rental income

Sample accounts:

• 4000 – Sales Income

• 4100 – Service Income

• 4200 – Other Income

5. Expenses – Money Going Out

These are the costs associated with running your business.
Separating expenses into clear categories helps with tax deductions and budgeting.

Examples:

• Rent or utilities

• Marketing and advertising

• Supplies

• Payroll

• Insurance

Common expense accounts:

• 5000 – Cost of Goods Sold (COGS)

• 6100 – Rent Expense

• 6200 – Utilities

• 6300 – Office Supplies

• 6400 – Marketing and Advertising

Why the Chart of Accounts Matters

A well-organized CoA makes your life easier in many ways:

• Accurate Reports: See exactly how much you’re making and spending.

• Stress-Free Taxes: Clear categories make tax prep simple for you and your accountant.

• Better Decisions: Identify which products, services, or marketing efforts yield the highest profits.

• Avoid Errors: Fewer misclassified transactions mean fewer headaches later.

If you ever feel overwhelmed, start simple. You can always add more accounts later as your business grows.

How to Set Up Your Chart of Accounts

You don’t need to be an accountant to get started! Here’s a step-by-step process:

Step 1: Choose Your Software

Most small businesses use QuickBooks Online or QuickBooks Desktop, but the process is similar in other accounting programs, such as Wave or Xero.

Step 2: Start With the Basics

Set up the five core sections (Assets, Liabilities, Equity, Income, Expenses).
Begin with a small, manageable list:

• 1–2 bank accounts

• 1 income account per revenue stream

• 5–10 expense categories

Step 3: Number Your Accounts (Optional but Helpful)

Many bookkeepers use numbering to keep things organized (sometimes QBs adds an additional zero (0), so you’re accounts are in the tens of thousands - that extra zero doesn’t matter):

• 1000s = Assets

• 2000s = Liabilities

• 3000s = Equity

• 4000s = Income

• 5000–7000s = Expenses

Example:

• 1000 – Checking Account

• 2100 – Loan Payable

• 4000 – Sales Income

• 6400 – Marketing Expense

Step 4: Customize for Your Business

Add accounts specific to your industry:

• Restaurants: Food inventory, alcohol sales, kitchen equipment

• Retail: Inventory, shipping costs, returns

• Service-based: Separate services for better reporting

Don’t create an account for every tiny thing.
For example, “Coffee” doesn’t need its own account—just include it under Office Supplies.

Common Mistakes to Avoid

1. Too Many Accounts
   Makes reports difficult to read and understand.

2. Mixing Personal and Business Expenses
   Keep them entirely separate to stay audit-proof.

3. Using Uncategorized Accounts
   Always assign transactions to a specific account.

4. Ignoring Your CoA After Setup
   Review it at least once a year to keep it accurate and relevant.

When to Call a Pro

If your books feel overwhelming or your CoA is a tangled mess, a professional bookkeeper can help you clean it up and create a clear system.

This is especially important if you:

• Have payroll or inventory

• Are preparing for tax season

• Want to apply for a loan or grant

Your Chart of Accounts may seem intimidating at first, but it’s simply a tool to help you understand your business’s financial health. Start small, keep it organized, and don’t be afraid to ask for help when you need it.

Time spent setting up a solid CoA now will save you countless hours (and headaches!) in the future.