How to Set Up a Chart of Accounts for Your Small Business

The chart of accounts (COA) is the master list of every category used to record financial transactions in your business. Think of it as the filing system for your entire financial life. Set it up well and your books stay organized. Set it up poorly and you'll spend years untangling the mess.

A standard chart of accounts includes five main categories:

1. Assets — what your business owns (cash, equipment, receivables)
2. Liabilities — what your business owes (loans, credit cards, payables)
3. Equity — the owner's stake in the business
4. Income — revenue from sales and services
5. Expenses — costs of running the business

Each category contains individual accounts. For example, under Expenses you might have: Rent, Utilities, Software Subscriptions, Advertising, Payroll, and so on.

This is where many business owners go wrong — either too few accounts (everything lumped into "Miscellaneous") or too many (a separate account for every vendor). The right level of detail gives you useful reporting without making data entry a nightmare.

A good rule of thumb: create an account if you'll want to see that category on a report. If you don't care about the breakdown, lump it together.

QuickBooks Online comes with a default chart of accounts based on your industry. You can customize it by:

• Adding accounts specific to your business
• Merging duplicate accounts
• Making unused accounts inactive
• Renaming accounts to match your terminology

Getting this right from the start saves hours of cleanup later.

• Using "Ask My Accountant" as a catch-all (it's not a real account)
• Creating duplicate accounts for the same thing
• Miscategorizing personal expenses as business expenses
• Not separating cost of goods sold from operating expenses

Need help setting up or cleaning up your chart of accounts? Our QuickBooks ProAdvisors can get your books organized correctly. Contact us to get started.