Chart of Accounts
Organizing your account structure — the blueprint for your entire accounting system.
Why This Matters
Imagine a library with 10,000 books but no organizational system. Some books are on the floor, some are on shelves, some are mixed with magazines. Finding anything is a nightmare.
That's what a business would be like without a chart of accounts.
A chart of accounts is your master list—every account your business uses, organized logically with consistent naming. It's the blueprint that ensures every transaction gets recorded in the right place, every financial statement is consistent, and your bookkeeper and accountant are literally speaking the same language.
What Is a Chart of Accounts?
A chart of accounts is a master list of all accounts a company uses, organized by category (assets, liabilities, equity, revenue, expenses) with assigned account numbers.
Think of it like a filing cabinet:
CHART OF ACCOUNTS
ABC Coffee Shop
Account Numbering Systems
The numbers aren't random. They follow a logical structure.
How It Works
First Digit = Account Category
Second/Third Digits = Subcategory
Real Example: Sub-accounts
When someone says "Post to 1001," everyone knows exactly which account they mean.
Why Account Numbers Matter
Prevents Confusion
"Post to Cash" might mean different accounts. "Post to 1000" has zero ambiguity.
Makes Data Entry Faster
Type "1000" instead of "Cash - Checking Account" in accounting software.
Facilitates Reporting
Financial statements are organized by number. Software knows "4000 series = revenue."
Allows for Growth
Need a new account? Assign 1003 for a new bank account instead of renumbering everything.
Types of Accounts in the Chart
Asset Accounts
Current Assets (convert to cash within a year)
- • Cash (checking, savings, petty cash)
- • Accounts Receivable
- • Inventory
- • Prepaid Expenses
Long-Term Assets (used for more than a year)
- • Equipment
- • Furniture
- • Buildings
- • Land
Liability Accounts
Current Liabilities (due within a year)
- • Accounts Payable
- • Salaries Payable
- • Interest Payable
- • Unearned Revenue
Long-Term Liabilities (due after a year)
- • Long-Term Notes Payable
- • Mortgages Payable
- • Bonds Payable
Equity Accounts
- • Owner's Capital (initial investment)
- • Owner's Drawings (money taken out by owner)
- • Common Stock (for corporations)
- • Retained Earnings (accumulated profits)
Revenue Accounts
- • Sales Revenue
- • Service Revenue
- • Rental Income
- • Interest Income
- • Dividend Income
Expense Accounts
- • Cost of Goods Sold
- • Salaries and Wages
- • Rent Expense
- • Utilities Expense
- • Supplies Expense
- • Depreciation Expense
- • Insurance Expense
- • Advertising Expense
Real-World Example: Building a Chart
Let's say you're starting a consulting business. Here's how to build your chart:
Identify Account Categories
Money in the bank, what customers owe you, equipment, what you owe suppliers, your investment, fees you earn, and expenses.
Organize by Type
Group accounts into Assets (1000s), Liabilities (2000s), Equity (3000s), Revenue (4000s), and Expenses (5000s).
Assign Numbers
Give each account a unique number within its category range.
| Account # | Account Name |
|---|---|
| 1000 | Cash - Checking Account |
| 1010 | Petty Cash |
| 1100 | Accounts Receivable |
| 1200 | Office Equipment |
| 2000 | Accounts Payable |
| 2100 | Salaries Payable |
| 3000 | Owner's Capital |
| 3100 | Owner's Drawings |
| 4000 | Consulting Fees |
| 5000 | Salaries Expense |
| 5100 | Rent Expense |
| 5200 | Utilities Expense |
| 5300 | Supplies Expense |
Common Mistakes in Chart of Accounts
Mistake #1: Accounts That Are Too Vague
What expenses? Which equipment? No detail!
Much more specific and useful for reporting.
Mistake #2: Inconsistent Naming
Three different ways to say the same thing!
Consistent naming pattern makes reporting easier.
Mistake #3: Too Many Unnecessary Accounts
Way too detailed—financial statements will be massive.
Consolidated into meaningful categories.
Mistake #4: Forgetting Accounts You'll Need
Example: You buy equipment but create no depreciation expense account!
Always include depreciation accounts from the start:
- • Depreciation Expense - Equipment (5600)
- • Accumulated Depreciation - Equipment (1510)
How to Set Up Your Chart of Accounts
Decide Your Account Structure
What types of assets, liabilities, revenues, and expenses will your business have?
Create Categories Within Each Type
What subcategories make sense? (Current vs. long-term assets? Different types of revenue?)
List Specific Accounts
What specific accounts will you need? (Cash, A/R, Inventory, etc.)
Assign Numbers
Use the 1000-5999 system (1000s = assets, 2000s = liabilities, etc.)
Review and Finalize
Does every account make sense? Is there overlap? Are names consistent?
Implement and Communicate
Share the chart with everyone who needs it (bookkeeper, accountant, managers).
Digital vs. Paper Charts
Paper Chart
A typed or handwritten list showing account names and numbers. Kept in a binder or file for reference.
Digital Chart
Built into accounting software (QuickBooks, Xero, Sage). The software uses it to:
- • Guide where to record entries
- • Generate financial statements
- • Create reports
- • Track balances
Today, almost everyone uses digital charts.
Modifying Your Chart
When to Add an Account
- • New type of transaction that doesn't fit existing accounts
- • Need to track something separately for management decisions
- • Business has expanded into a new revenue stream
When to Remove an Account
- • Account hasn't been used in years
- • Two similar accounts can be combined
- • Account no longer makes sense for your business
Important: Don't delete accounts with balances. Mark them as "Inactive" to preserve historical data.
Key Takeaway
A chart of accounts is the organizational blueprint for your entire accounting system. It assigns numbers to accounts, organizes them logically, and ensures consistency across journal entries, ledgers, and financial statements. A well-designed chart makes accounting efficient and clear.
Test Your Understanding
1. In a standard chart of accounts, what do accounts numbered 4000-4999 represent?
2. You're creating a chart of accounts for a bakery. Which account is most likely to appear?
3. You need to track three different types of expenses separately: rent, utilities, and supplies. What should you do?
4. An account has not been used for three years. What should you do?
5. True or False: Everyone in a business should have access to and understand the chart of accounts.
Ready to Practice?
You now understand how to organize accounts in a chart. The Practice Lab is where you'll use it—select accounts from a chart when recording transactions.