Chart of Accounts for a Small Business: A Starter Structure You Can Adapt

When a transaction is recorded, it has to be put somewhere: sales, rent, stock, salaries. The list of those places is called the chart of accounts. It is the least exciting document in a business and one of the most consequential, because every report you will ever read is built from it. A chart that is too vague gives reports that say nothing. One that is too detailed is not followed.

The five groups

All accounts belong to one of five groups. Three describe what the business has and owes at a moment in time. Two describe what happened over a period.

1. Assets. What the business owns or is owed: cash, bank balances, money customers owe you, stock, equipment.

2. Liabilities. What the business owes: supplier bills, loans, taxes payable, customer deposits.

3. Equity. The owner's stake: money put in, profits kept in the business, less withdrawals.

4. Income. What the business earns from sales and other sources.

5. Expenses. What the business spends to earn that income.

Assets, liabilities and equity make up the balance sheet. Income and expenses make up the profit and loss statement.

A numbering scheme

Numbers keep accounts in order and leave room to add more. A common scheme:

• 1000 to 1999: Assets
• 2000 to 2999: Liabilities
• 3000 to 3999: Equity
• 4000 to 4999: Income
• 5000 to 5999: Cost of goods sold
• 6000 to 6999: Operating expenses
• 7000 to 7999: Other income and expenses

Leave gaps between numbers so that a new account can be inserted where it belongs.

A starter chart

Adapt the names to your business.

Assets

• 1010 Cash on hand
• 1020 Petty cash
• 1110 Bank account, main
• 1120 Bank account, savings
• 1130 E-wallet and payment gateway balance
• 1210 Accounts receivable
• 1310 Inventory
• 1410 Prepaid expenses, such as rent paid in advance
• 1510 Equipment
• 1520 Vehicles
• 1590 Accumulated depreciation

Liabilities

• 2010 Accounts payable
• 2110 Taxes payable
• 2120 Salaries payable
• 2210 Customer deposits
• 2310 Bank loan

Equity

• 3010 Owner's capital
• 3020 Owner's withdrawals
• 3030 Retained earnings

Income

• 4010 Sales, products
• 4020 Sales, services
• 4090 Sales discounts and returns

Cost of goods sold

• 5010 Purchases or cost of stock sold
• 5020 Raw materials
• 5030 Packaging
• 5040 Shipping to customers
• 5050 Direct labour

Operating expenses

• 6010 Salaries and wages
• 6020 Employee benefits and insurance contributions
• 6110 Rent
• 6120 Electricity and water
• 6130 Internet and phone
• 6210 Marketing and advertising
• 6220 Marketplace and payment fees
• 6310 Office supplies
• 6320 Software subscriptions
• 6410 Transport and fuel
• 6420 Repairs and maintenance
• 6510 Professional fees
• 6610 Bank charges
• 6710 Depreciation
• 6910 Other expenses

Other

• 7010 Interest income
• 7110 Interest expense

About forty accounts. That is enough to produce meaningful reports for most small businesses.

How to adapt it

Ask what you want your reports to tell you.

• Selling in several channels? Split sales into store, online and wholesale to see which earns most.
• A service business? You may not need inventory accounts. You may want sales split by type of service.
• Marketplace fees significant? Keep them as their own account, not hidden in "other".
• Several branches? Use the same accounts everywhere and tag transactions by branch, instead of creating a separate set of accounts for each.

A good test: for each account, can you name a decision that depends on seeing it separately? If not, merge it.

Mistakes that ruin reports

• A large "other" or "miscellaneous" account. If it holds more than a few percent of expenses, it is hiding something. Look inside and create proper accounts.
• Mixing personal and business. Owner's personal spending belongs in owner's withdrawals, not in expenses.
• Putting stock purchases in expenses. Stock is an asset until it is sold. Expensing it on purchase makes profit swing with buying patterns.
• Recording loan money as income. A loan is a liability. Repaying the principal is not an expense, only the interest is.
• Recording equipment as an expense of the month. A machine used for five years is an asset, expensed gradually through depreciation.
• Duplicate accounts. "Phone", "Telephone" and "Mobile bill" split one cost three ways.
• Changing the chart every month. Comparisons across periods stop working.

Rules for keeping it tidy

• One person approves new accounts.
• Each account has a one-line description of what belongs in it.
• Review the chart once a year.
• Deactivate accounts that are no longer used instead of deleting them.
• Train whoever records transactions on the ten accounts used most.

Sub-accounts and tags

When you need detail, there are two tools:

• Sub-accounts under a parent, such as Marketing split into online ads, printed materials and events. The parent still totals them.
• Tags or dimensions such as branch, project or product line, applied to transactions without multiplying accounts.

Use tags for "where" and "for whom". Use accounts for "what".

How it connects to reports

• The profit and loss statement lists income, cost of goods sold and expenses, in the order of your chart.
• The balance sheet lists assets, liabilities and equity.
• The cash flow report follows movements in the cash and bank accounts.

If a report is hard to read, the cause is usually the chart behind it.

Get it checked

Tax and reporting rules differ by country and by business type. Once you have a draft, ask an accountant to review it against the requirements that apply to you. An hour of review at the start prevents months of reclassifying later.

Polynusa's bookkeeping starts with a ready chart of accounts that you can adapt, and it posts invoices, payments and receipts into it from the same workspace as sales. See the plans on the pricing page.

Summary

Organise accounts into assets, liabilities, equity, income and expenses, with numbers that leave room to grow. Start with about forty accounts and add only when a decision needs the detail. Keep stock, loans, equipment and owner withdrawals out of the expense accounts, keep "other" small, and review the chart once a year.

FAQ

How many accounts should a small business have?

Thirty to fifty is enough for most. Too few and the reports cannot tell you where money went. Too many and staff choose the wrong one or everything ends up in a miscellaneous account. Add an account only when you need to see that item separately.

What is the difference between cost of goods sold and operating expenses?

Cost of goods sold is what you pay directly to produce or buy what you sell, such as stock, raw materials and packaging. Operating expenses are the costs of running the business whether or not you sell anything today, such as rent, salaries of office staff and marketing.

Can the chart of accounts be changed later?

Yes, and it should evolve. Add accounts when a new kind of income or cost becomes significant. Avoid deleting or renaming accounts that already hold transactions in the middle of a year, because it breaks comparisons. Mark them inactive instead.