Chart of Accounts for Small Business: Complete Setup Guide

A chart of accounts (COA) is the foundation of your business's financial organization. Think of it as a filing system for every dollar that flows in and out of your business. Without a well-structured COA, your bookkeeping becomes messy, financial reports are confusing, and tax time is painful.

This comprehensive guide walks you through setting up a chart of accounts that works for small businesses—organized enough to provide real insights, but simple enough to maintain. You'll learn the standard account categories, best practices for numbering, and get a complete template you can customize for your business.

What Is a Chart of Accounts?

A chart of accounts is a complete, numbered list of all the accounts your business uses to record financial transactions. Each account captures a specific type of financial activity—cash coming in, expenses going out, assets you own, debts you owe.

A chart of accounts is a complete, numbered list of all the accounts your business uses to record financial transactions. Each account captures a specific type of financial activity—cash coming in, expenses going out, assets you own, debts you owe.

Think of it like a filing cabinet with labeled folders. When a transaction occurs, you need to know exactly which "folder" it belongs in. Your chart of accounts defines those folders and gives each one a unique identifier.

Every financial report your business generates—profit and loss statements, balance sheets, cash flow reports—pulls from your chart of accounts. A well-designed COA means accurate, useful reports. A messy COA means numbers that don't help you make decisions.

The Five Account Categories

Every chart of accounts organizes transactions into five main categories. These categories follow standard accounting principles and match how financial statements are structured.

Every chart of accounts organizes transactions into five main categories. These categories follow standard accounting principles and match how financial statements are structured.

1. Assets (100-199)

Assets are what your business owns or is owed. They represent value and increase your business's net worth.

Current Assets (100-139)

Resources expected to be converted to cash or used within one year:

• 101 Cash on Hand: Physical currency kept at your business
• 105 Checking Account: Your primary business bank account
• 110 Savings Account: Business savings and reserves
• 120 Accounts Receivable: Money owed to you by customers
• 125 Inventory: Goods held for sale (if applicable)
• 130 Prepaid Expenses: Services paid for in advance (insurance, rent)

Fixed Assets (140-169)

Long-term resources used in operations:

• 140 Equipment: Computers, machinery, tools
• 145 Accumulated Depreciation - Equipment: Tracks value reduction over time
• 150 Vehicles: Business-owned vehicles
• 155 Accumulated Depreciation - Vehicles: Vehicle depreciation
• 160 Furniture and Fixtures: Office furniture, display cases
• 165 Leasehold Improvements: Improvements to rented space

Other Assets (170-199)

Assets that don't fit other categories:

• 170 Security Deposits: Deposits paid on leases or utilities
• 175 Long-Term Investments: Investments held beyond one year
• 180 Intangible Assets: Patents, trademarks, goodwill

2. Liabilities (200-299)

Liabilities are what your business owes to others. They represent obligations that must be fulfilled.

Current Liabilities (200-249)

Debts due within one year:

• 200 Accounts Payable: Money you owe to vendors and suppliers
• 210 Credit Card Payable: Outstanding credit card balances
• 220 Payroll Liabilities: Wages and taxes owed to employees
• 225 Sales Tax Payable: Collected sales tax awaiting remittance
• 230 Short-Term Loans: Loans due within one year
• 235 Current Portion of Long-Term Debt: This year's payments on long-term loans
• 240 Unearned Revenue: Payments received for services not yet delivered

Long-Term Liabilities (250-299)

Debts due beyond one year:

• 250 Long-Term Loans: Bank loans, equipment financing beyond one year
• 260 Mortgage Payable: Property loans
• 270 Lease Obligations: Long-term lease commitments

3. Equity (300-399)

Equity represents the owner's stake in the business—what's left when you subtract liabilities from assets. It's the "net worth" of the business.

• 300 Owner's Capital: Original investment in the business
• 305 Owner's Draw: Money taken out by the owner (reduces equity)
• 310 Retained Earnings: Accumulated profits kept in the business
• 320 Common Stock: Shares issued (for corporations)
• 330 Additional Paid-In Capital: Amounts above par value (corporations)

4. Revenue (400-499)

Revenue accounts track income earned from business activities. Keep these detailed enough to understand what drives your business.

• 400 Sales Revenue: Income from products sold
• 410 Service Revenue: Income from services provided
• 420 Consulting Revenue: Income from consulting work
• 450 Interest Income: Interest earned on bank accounts
• 460 Other Income: Miscellaneous income sources
• 490 Sales Returns and Allowances: Reduces revenue for returns (contra-revenue)

5. Expenses (500-699)

Expenses track costs incurred to operate your business. This is typically the longest section of your COA.

Cost of Goods Sold (500-519)

• 500 Cost of Goods Sold: Direct costs of products sold
• 505 Direct Labor: Labor directly producing goods/services
• 510 Materials and Supplies: Raw materials for production
• 515 Subcontractor Costs: Outsourced production costs

Operating Expenses (520-649)

• 520 Advertising and Marketing: All marketing costs
• 530 Bank Fees and Charges: Bank and payment processing fees
• 540 Depreciation Expense: Annual equipment value reduction
• 550 Insurance: Business insurance premiums
• 560 Legal and Professional Fees: Lawyers, accountants, consultants
• 570 Office Supplies: Paper, pens, general supplies
• 580 Rent Expense: Office or facility rent
• 590 Repairs and Maintenance: Equipment and facility upkeep
• 600 Software and Subscriptions: Business software costs
• 610 Telephone and Internet: Communication costs
• 620 Travel and Entertainment: Business travel expenses
• 630 Utilities: Electric, gas, water
• 640 Wages and Salaries: Employee compensation
• 645 Payroll Taxes: Employer portion of payroll taxes

Other Expenses (650-699)

• 650 Interest Expense: Interest on loans and credit
• 660 Income Tax Expense: Federal and state income taxes
• 670 Miscellaneous Expense: Expenses not fitting other categories

Numbering System Best Practices

A good numbering system makes your COA scalable and easy to navigate:

A good numbering system makes your COA scalable and easy to navigate:

• Leave Gaps: Use 101, 105, 110 rather than 101, 102, 103. This allows adding accounts later without renumbering.
• Use Consistent Structure: If Equipment is 140 and its depreciation is 145, follow that pattern for Vehicles (150/155).
• Reserve Ranges: Keep 100s for assets, 200s for liabilities, etc. Don't mix categories within number ranges.
• Sub-Account Strategy: Some systems support sub-accounts (600-10 for Software, 600-20 for Web Hosting). This adds detail without cluttering the main list.

Industry-Specific Considerations

Your specific business type may need additional accounts:

Your specific business type may need additional accounts:

Retail Businesses

Add detailed inventory accounts (by product type), sales tax collected accounts for multiple jurisdictions, and merchant processing fees.

Service Businesses

Create separate revenue accounts for different service types, track subcontractor costs separately from employee costs, and include accounts for client reimbursables.

Contractors

Include work-in-progress accounts, job cost categories, equipment rental, and mobilization costs.

Common COA Setup Mistakes

Avoid these errors that cause headaches later:

Avoid these errors that cause headaches later:

• Too Many Accounts: You don't need an account for every vendor or every type of supply. Consolidate where the detail isn't useful for decisions.
• Too Few Accounts: A single "Expenses" account tells you nothing. Break expenses into categories meaningful to your business.
• Inconsistent Numbering: Jumping from 101 to 500 to 115 creates confusion. Maintain logical sequence.
• Missing Critical Categories: Forgetting accounts for common transactions means you'll add them later in disorganized fashion.
• Not Planning for Growth: A COA that works for one person won't scale to ten employees and multiple revenue streams. Design with growth in mind.

Maintenance and Review

Your chart of accounts isn't set in stone.

Your chart of accounts isn't set in stone. Review it at least annually:

• Add New Accounts: When new transaction types emerge, create appropriate accounts.
• Consolidate Unused Accounts: If an account hasn't had activity in years, consider merging it.
• Update for Changes: New locations, products, or services may need new accounts.
• Validate Tax Alignment: Ensure expense categories align with tax reporting needs.

Using Invoicemonk for Your Chart of Accounts

Invoicemonk comes with a pre-configured chart of accounts suitable for most small businesses, including:

Invoicemonk comes with a pre-configured chart of accounts suitable for most small businesses, including:

• Standard account categories properly numbered
• Easy customization to add, modify, or hide accounts
• Automatic posting from invoices and expenses to correct accounts
• Financial reports that pull from your COA structure

Related Resources

• Complete Small Business Accounting Guide
• Financial Reports Every Business Needs
• Cash vs Accrual Accounting Explained
• Monthly Financial Review Checklist
• Invoicemonk Accounting Features