What Is a Chart of Accounts & a Sample Numbering System

A chart of accounts is a list of all of your company’s accounts together in one place. Similar to a filing cabinet for your company’s accounting system, it’s used to organize transactions into groups. This is one of the many concepts discussed in our Accounting 101 article.

Please see our example below for a better understanding of what’s included in a sole proprietorship’s chart of accounts.

A small business accounting software comes with a default chart of accounts. Read our best small business accounting software guide for more information.

Types of Accounts To Include on Your Chart of Accounts

The main account types include assets, liabilities, equity, revenue, and expenses. These are described in more detail below:

Assets

Assets are the resources that a company controls to run and grow its business. They’re divided into two categories: current and noncurrent. Current assets can be thought of as short-term assets, which are necessary for a company’s immediate needs, whereas noncurrent assets are longer term, as they have a useful life of longer than a year.

Common asset accounts that you should include in your chart of accounts are:

Liabilities

Liabilities are what a company owes or has borrowed, usually a sum of money. They can include a future service owed to others or a previous transaction that created an unsettled obligation. Similar to assets, liabilities are classified as current and noncurrent. Current liabilities are expected to be concluded within 12 months or less while noncurrent liabilities are long-term or greater than 12 months.

Common liability accounts that you should include in your chart of accounts are:

• Accounts payable (A/P)
• Line of credit
• Accrued expenses
• Loan or notes payable
• Taxes payable

Owner’s Equity

Owner’s equity is the owner’s rights to the assets of the business or what’s left over after subtracting the liabilities from the assets. It includes money invested by the owner of the business plus the profits of the business since its inception. If you subtract the money taken out of the business by the owner and money owed to others, you’ll be left with the owner’s equity amount.

The owner’s equity accounts to include vary based on the entity type of the business.

Sole proprietors should have the following:

• Contributed capital
• Retained earnings
• Owner withdrawals (or draws)

A partnership or limited liability company (LLC) should have a separate equity account for each partner, such as “Pat Doe, Capital.” Partnerships don’t include withdrawal accounts because partner distributions are removed directly from the partner’s capital account. They also don’t have a retained earnings account as net income at the end of the year is distributed to the capital accounts.

Meanwhile, corporations should include the following:

• Common stock
• Preferred stock
• Additional paid-in capital
• Retained earnings

Revenue

Revenue is the money generated from normal business operations and essentially whatever you collect from your customers prior to deducting any costs. Exclude nonoperating income, such as interest, in your revenue accounts.

A sample of revenue accounts to include are:

• Service revenue
• Product sales

Expenses

An expense is a cost incurred by a business in its operations to produce revenues. You should exclude accounts for nonoperating expenses and losses with your expenses but include:

• Wages expense
• Rent expense
• Tax expense

Other Income

Other income refers to income earned outside of the normal way that you do business. Some accounts to include are:

• Gain on the sale of an asset
• Insurance settlement
• Gain on a stock sale
• Rent from a building you own

Other Expenses

This refers to expenses that are outside of your normal operating activity. An account you should include is the loss on a sale of an asset. While it’s helpful to understand the different components of a chart of accounts, you may want to consider hiring a bookkeeper to help you set it up and customize it to your business. Check out our guide on what bookkeeping is for more information about the tasks that bookkeepers perform.

Sample Numbering System

With a chart of accounts numbering system, each account is allocated a code depending on the complexity of the business and the amount of detail required from its financial reporting system. The purpose of the numbering system is to group similar accounts together to provide an easy method of remembering and referring to an account when preparing journal entries.

For a small business without the need to develop departmental or location information, a four-digit chart of accounts numbering system can be used. For example, the following ranges might be allocated:

Within each range are sub-categories for each account. For example, the expense of office supplies might be assigned the code 5600, or a credit card liability the code 2200.

Adding Department or Location Codes

If your company has multiple departments or locations, you can distinguish them by appending a two-digit code to the end of the four-digit number. For example, you can assign different departments the following codes:

• -10 Accounting
• -20 Administrative
• -30 Human Resources
• -40 Sales & Marketing

Assume supplies expense has an account number of 5200. Supplies purchased by the accounting department would be recorded in accounting number 5200-10 while those by human resources (HR) would go to account 5200-30.

Frequently Asked Questions (FAQs)

Why is the chart of accounts important?

The chart of accounts is important because it allows you to organize your company’s financial data and distill it into clear and logical categories. It’s also the foundation for financial reports—having all of your financial data in one place and seeing how the different accounts relate to each other can provide important insights into your company’s performance. It can also help you with:

• Filing taxes: A properly-organized chart of accounts will simplify your tax season by grouping income and expenses into the items that require separate listing on the tax return.
• Separating expenses: An effective chart of accounts will provide a separate expense account for each type of expense you wish to track. Avoid combining different expenses into a single account as this will decrease the usefulness of your accounting reports.

What are best practices for maintaining an accurate chart of accounts?

There are a few best practices that can be adopted to maintain an accurate chart of accounts. These include:

• Aim for consistency: The goal is to create a chart of accounts that doesn’t change much from year to year. This enables you to compare the performance of different accounts over time, which will provide valuable insight into how you’re managing your business finances.
• Don’t go overboard with detail: Your chart of accounts should give you important information, but You don’t need a separate account for each product you sell, for example. Certain items can be lumped together.
• Wait to delete old accounts: It’s a good idea to wait until the end of the year to delete old accounts. Renaming or merging accounts can create headaches when tax time rolls around.
• Close or make old accounts inactive: Make it a policy to review all of your accounts each year to determine if there’s an opportunity to consolidate some of them. This will make it more manageable to handle your accounts.

Bottom Line

The chart of accounts is designed to be a map of your business and its various financial parts. A well-designed chart of accounts should separate out all of the company’s most important accounts and make it easy to determine which transactions should be recorded in which account. You can also use a numbering system to group similar accounts and provide further detail with classification.