Key takeaways
What this article covers, in order:
- Why your account list matters more than it looks
- The five groups, in plain English
- A numbering scheme with room to grow
- A sample chart of accounts for a service business
- Five rules that keep the list clean
- How the chart scales as you grow
A chart of accounts is the list of buckets every transaction in your business gets sorted into. A good one for a small business has five groups (assets, liabilities, equity, income and expenses), a numbering scheme with room to grow, and only as many accounts as you'll actually use to make decisions. Most service businesses can start with 30 to 45 accounts and be fine for years.
Why your account list matters more than it looks
Here's a scene we see a lot. Leo and Sam run a two-person video production studio in Denver. When they set up their books in Jan 2026, they accepted the default list the software suggested, then added accounts whenever something didn't seem to fit. By Sep 2026 they have 112 accounts, including "Camera Stuff," "Gear," "Equipment Rental," "Rentals - Equipment," and an account named after one specific client.
Their P&L is three pages long and tells them almost nothing. They can't answer a simple question like "how much do we spend on gear each quarter?" because gear is spread across five accounts with overlapping meanings.
The chart of accounts decides what your reports can tell you. Too few accounts and everything blurs into "Expenses." Too many and the signal drowns. The goal is a list where every account answers a question you'd actually ask.
The five groups, in plain English
Every account belongs to one of five groups. The first three appear on the Balance Sheet; the last two appear on the P&L.
- Assets: What the business owns or is owed. Cash, money customers owe you, equipment.
- Liabilities: What the business owes. Credit card balances, loans, bills you haven't paid.
- Equity: The owners' stake. Money put in, money taken out, and profits kept in the business over time.
- Income (revenue): Money earned from selling your products or services.
- Expenses: Costs of running the business. Many businesses split out cost of goods sold (direct costs of what you sell) from operating expenses.
The basic equation ties them together: assets equal liabilities plus equity. Income and expenses flow into equity as profit or loss.
A numbering scheme with room to grow
Numbers aren't required, but they keep the list in a sensible order and make it obvious which group an account belongs to. A common US layout:
| Range | Group | Shows on |
|---|---|---|
| 1000 to 1999 | Assets | Balance Sheet |
| 2000 to 2999 | Liabilities | Balance Sheet |
| 3000 to 3999 | Equity | Balance Sheet |
| 4000 to 4999 | Income | P&L |
| 5000 to 5999 | Cost of goods sold | P&L |
| 6000 to 7999 | Operating expenses | P&L |
| 8000 to 8999 | Other income and expense | P&L |
Leave gaps. Number accounts by 10s (6010, 6020, 6030) so you can slot a new one in later without renumbering everything.
A sample chart of accounts for a service business
This is a starting point for a small service company like Leo and Sam's. Trim what you don't need.
| No. | Account | Group |
|---|---|---|
| 1010 | Business Checking | Asset |
| 1020 | Business Savings | Asset |
| 1100 | Accounts Receivable | Asset |
| 1200 | Undeposited Funds | Asset |
| 1300 | Prepaid Expenses | Asset |
| 1500 | Equipment | Asset |
| 1510 | Accumulated Depreciation, Equipment | Asset (contra) |
| 2010 | Accounts Payable | Liability |
| 2100 | Business Credit Card | Liability |
| 2200 | Sales Tax Payable | Liability |
| 2500 | Equipment Loan | Liability |
| 3010 | Owner Contributions | Equity |
| 3020 | Owner Draws | Equity |
| 3900 | Retained Earnings | Equity |
| 4010 | Production Services | Income |
| 4020 | Editing Services | Income |
| 5010 | Freelance Crew | Cost of goods sold |
| 5020 | Equipment Rental for Jobs | Cost of goods sold |
| 6010 | Advertising and Marketing | Expense |
| 6020 | Bank and Processing Fees | Expense |
| 6030 | Insurance | Expense |
| 6040 | Software Subscriptions | Expense |
| 6050 | Rent | Expense |
| 6060 | Travel | Expense |
| 6070 | Meals | Expense |
| 6080 | Professional Fees | Expense |
| 6090 | Small Tools and Equipment | Expense |
| 6100 | Depreciation Expense | Expense |
| 8010 | Interest Expense | Other expense |
A couple of notes on that list. Owner Draws and Owner Contributions fit sole proprietors and many LLCs; corporations usually use different equity accounts, so ask your CPA which equity setup fits your structure. Sales Tax Payable is only there if you collect sales tax. Undeposited Funds is a clearing account for payments received but not yet deposited; you may not need it if all your payments land directly in the bank.
Five rules that keep the list clean
1. Create an account only when it answers a question
Before adding one, finish this sentence: "I want to know how much we spend on ____ each month." If you can't, use an existing account.
2. Don't create accounts for customers or vendors
Leo and Sam's client-named account is a classic mistake. Customers and vendors belong in your contact list, and reports by customer or vendor come from there. The chart of accounts tracks what kind of transaction it was, not who it was with.
3. Split income the way you'd split decisions
If you'd raise prices on editing but not on production, separate them. If every service is priced and sold the same way, one income account is fine.
4. Keep cost of goods sold honest
COGS is for costs that rise and fall with each job or product sold: freelance crew on a shoot, materials for a cake order, inventory you resell. Rent and software are operating expenses even if you can't do the work without them. Getting this split right is what makes gross margin meaningful.
5. Make accounts inactive, don't delete them
When an account stops being useful, make it inactive. Deleting accounts with history can scramble old reports and reconciliations.
How the chart scales as you grow
A simple chart doesn't mean a chart that can't grow. Typical additions as a business gets bigger:
- A second location or line of business: Often better handled with classes or locations than with duplicate expense accounts, if your software supports them.
- Inventory: An Inventory Asset account plus COGS accounts that move as you sell.
- Payroll: Wages, payroll taxes and benefits as separate expense accounts, plus liability accounts for amounts withheld. Your payroll provider usually suggests the mapping.
- Loans and leases: One liability account per loan so each balance can be checked against its lender statement.
The best time to restructure is the start of a fiscal year, so the year's reports aren't split between two systems. If you change mid-year, write down what moved where.
Cleaning up a bloated chart
If you already have a Leo-and-Sam situation:
- Export the account list with balances.
- Group accounts that mean the same thing.
- Pick one survivor for each group.
- Merge or reclassify the others into it.
- Make the empty ones inactive.
Leo and Sam got from 112 accounts to 41 in an afternoon, and their P&L now fits on one page. Your CPA may have opinions on how accounts map to the reports they prepare, so a five-minute call before you merge anything is worth it.
How HelloBooks helps
HelloBooks gives you the P&L, Balance Sheet and Cash Flow reports on every plan, including Free ($0, no credit card, no expiry), so you can see straight away whether your account structure is telling you anything useful. You can connect most US banks and credit cards, or import statement CSVs, and categorize transactions into your accounts. On Starter ($14.99/month), AI auto-categorization suggests categories so your chosen structure gets applied consistently. Pro ($39.99/month) adds AI Analysis on every report. You can invite your CPA or bookkeeper into the same books to review your setup. More on bookkeeping features and accounting for LLCs.
FAQs
How many accounts should a small business have?
Most small service businesses do well with roughly 30 to 50. Product businesses with inventory may need a few more. The right number is whatever answers your real questions without overlap.
Do I have to number my accounts?
No, but numbers keep the list ordered by group and make it easier to add accounts in the right place later.
What's the difference between COGS and operating expenses?
COGS covers direct costs that move with each sale, such as materials or subcontractors on a job. Operating expenses are overhead like rent, software and insurance.
Can I change my chart of accounts mid-year?
Yes, but your year's reports will mix old and new structures. The start of a fiscal year is cleaner. Keep a note of any changes.
Should every customer have their own income account?
No. Track customers in your contact list and use reports by customer. Income accounts should describe the type of revenue.
Spend an hour on your account list now and every report after that gets easier to read.
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