How to Set Up a Chart of Accounts for a Small Business
A chart of accounts is the list of categories your bookkeeping sorts every transaction into, grouped as assets, liabilities, equity, income, cost of goods sold and expenses. A good one is short, numbered in ranges (for example 1000s for assets and 6000s for expenses), matches how your tax return and your lender read the numbers, and stays the same from month to month.
By SF Business Solutions · Our team includes one licensed CPA · 2 sources · Updated September 10, 2026
The standard structure
Most small-business charts follow the same order as the financial statements: balance sheet accounts first, then income and expense accounts. Numbering in ranges is a convention, not a rule, but it keeps related accounts together in reports. QuickBooks Online and Xero both support account numbers or codes.
| Range | Type | Examples |
|---|---|---|
| 1000–1999 | Assets | Checking, savings, accounts receivable, inventory, equipment |
| 2000–2999 | Liabilities | Credit cards, accounts payable, sales tax payable, loans, payroll liabilities |
| 3000–3999 | Equity | Owner contributions, owner draws or distributions, retained earnings |
| 4000–4999 | Income | Product sales, service revenue, refunds and discounts |
| 5000–5999 | Cost of goods sold | Materials, freight in, direct labor, subcontractors on client work |
| 6000–7999 | Operating expenses | Rent, salaries, software, advertising, insurance, professional fees |
| 8000–8999 | Other income and expense | Interest income and expense, gains or losses on selling assets |
Examples by type of business
Start from the standard structure and add only the detail your decisions need:
- E-commerce: income split by sales channel, an inventory asset, cost of goods sold, and separate accounts for marketplace and payment processing fees
- Construction: one set of accounts plus job or project tracking, rather than hundreds of job-specific accounts; retainage receivable and payable
- Professional services: service revenue by practice area, contractor costs, software and subscriptions
- Real estate: separate books per entity, or a class or location per property; rental income, repairs, mortgage interest and depreciation
- SaaS: subscription revenue, a deferred revenue liability, and hosting costs in cost of revenue
Match it to your tax return
Whoever prepares your return turns your accounts into the lines of a tax return, such as Schedule C for a sole proprietor or Form 1120-S for an S corporation. When each expense account maps cleanly to one line on that return, year-end preparation is faster and less error-prone.
The same goes for lenders. If a bank asks for gross margin, it helps when cost of goods sold is its own section rather than mixed into operating expenses.
Mistakes that make books hard to read
A chart of accounts usually goes wrong by growing, not by starting badly:
- Too many accounts: one per vendor or per small purchase type
- A "miscellaneous" account that ends up holding real money
- Owner draws or personal spending recorded as business expenses
- No separate account for sales tax collected, so it looks like income
- Renaming or merging accounts mid-year, which breaks month-to-month comparisons
Setting it up with SF Business Solutions
When we take on your books we set up or clean up the chart of accounts for your entity type in QuickBooks Online or Xero, so your reports and the tax return we prepare and file read the same way. If the existing chart has grown out of control, cleanup starts at $250; monthly bookkeeping after that starts at $250 a month.
How many accounts should a small business have?
Usually a few dozen, not hundreds. If an account has had no activity for a year or holds a single transaction, it probably belongs inside another one.
Should I number my accounts?
It helps. Number ranges keep related accounts together in reports, and QuickBooks Online and Xero both support account numbers or codes.
Should each vendor get its own expense account?
No. Track vendors in the vendor list and use expense accounts for the type of cost, such as rent, software or advertising.
Can I change my chart of accounts mid-year?
You can, but renaming or merging accounts mid-year makes comparisons harder. Plan bigger changes for the start of a year and note what moved where.
Where do owner draws go?
In equity, not expenses. Owner contributions and draws, or distributions for an S corporation, sit in equity accounts so they don't distort profit.
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