How to set up a chart of accounts for small business? (Free Template)

How to structure your chart of accounts for clear reporting and future growth

The chart of accounts is the backbone of business accounting. For small business owners, an organized chart of accounts makes bookkeeping easier and provides useful financial information at year-end when taxes are due. This guide covers what to include, how to assign numbers, and provides a simple chart of accounts template that you can use in your business.

Why do the Chart of Accounts Matter?

A CHART OF ACCOUNTS organizes each and every financial transaction into categories which represent business activity. Once accounts are logical and consistent the owners and accountants can issue meaningful profit and loss statements and balance sheets. For smaller businesses, a concise and practical chart of accounts leads to fewer errors, faster monthly closes, and better decision-making.

Essential Parts to include in a Small Business Chart of Accounts

The basic chart of accounts often includes five main categories: Assets, Liabilities, Equity, Revenue (or Income) and Expenses. Keeep each section short and to the point as per your business operations.

• Assets: Cash, accounts receivable, inventory, prepaid expenses and fixed assets. Add a line for checking, a line for savings, and a line for petty cash to account for liquid assets.
• Liabilities: Account payable, credit card, short-term loan, payroll liability and sales tax payable. Organize debts by when they are due if it is useful.
• Equity: Owner’s equity, owner withdrawals, retained earnings and any investors’ contributions. For single-owner businesses, restrict equity lines to the basics.
• Earnings: Sales, service and other (such as interest). If you require more granular reporting, do some messing around with breaking revenue down to specific product lines or service categories.
• Expenses: COGS, payroll, rent, utilities, marketing, professional fees and depreciation. Track controllable costs with expense accounts.

Numbering System: Keep It Simple

A predictable numbering scheme can be used to sort and filter accounts. Choose a short one and logically number it such as:

• 1000–1999 Assets
• 2000–2999 Liabilities
• 3000–3999 Equity
• 4000–4999 Income
• 5000–5999 Expenses

Have a low number range in the blocks and use small ranges between types. E.g. 1000–1099 for current assets and 1100–1199 for fixed ones. Don’t be too granular with numbers early on — you can always add subaccounts as the business expands.

Designing Levels and Subaccounts

Do not use more than three levels of hierarchy to prevent reporting from becoming unreadable. Level 1 is the largest classification (Assets), level 2 is the account (Cash), and level 3 is a potential subdivision of the account, if desired (Petty Cash). Subaccounts are handy if you want more detail without ending up with an unwieldy list of accounts at the highest level.

Small Business Chart of Accounts Example Template

Here is a condensed sample chart of accounts you could use as a template to set up your accounts according to the nature of your business. Adapt or add categories to fit with your business model.

• 1000 Assets
• 1010 Checking Account
• 1020 Savings Account
• 1030 Accounts Receivable
• 1200 Inventory
• 1300 Prepaid Expenses
• 1500 Fixed Assets
• 1510 Furniture & Equipment
• 1520 Accumulated Depreciation
• 2000 Liabilities
• 2010 Accounts Payable
• 2100 Credit Card Payable
• 2200 Sales Tax Payable
• 2300 Payroll Liabilities
• 2500 Short-Term Loans
• 3000 Equity
• 3010 Owner Capital
• 3020 Owner Draws
• 3030 Retained Earnings
• 4000 Income
• 4010 Product Sales
• 4020 Service Revenue
• 4030 Other Income
• 5000 Expenses
• 5010 Cost of Goods Sold
• 5110 Payroll Expense
• 5210 Rent Expense
• 5310 Utilities
• 5410 Marketing & Advertising
• 5510 Professional Fees
• 5610 Office Supplies
• 5710 Depreciation Expense

Suggestions to Tailor Your Chart of Accounts

• Grow incrementally: Start with a few accounts and grow as necessary. It is jarring to have too many points of view from the get-go.
• Be explicit in your names: Don't use short-hand that no-one else will understand. This sort of descriptive name speed bookkeeping along.
• Aggregate like items: Place similar expenses together (e.g., marketing categories) for easy spend analysis.
• Tighter subaccount control: Only use a subaccount when you require regularly scheduled, specific-level reporting for an item.

How to Set Up Your Chart of Accounts

• Review up-to-date reports: Find the common kind of transactions by examining last years’ financials.
• Create your chart: Open the sample chart and update account names to suit your business.
• Number the accounts: Use numbers for the numbering system to keep your accounts in a logical order.
• Map historical transactions: Reclassify key items into your new accounts to ensure consistency in reporting. Train the team: Make sure anyone who records transactions knows about the new accounts and naming conventions.
• Each month: Balance everything out, and refine your categories for the first few months.

Common Mistakes to Avoid

• Overcomplicating the chart: The more accounts, the greater chance of mistakes and lost time coding transactions.
• Mixing personal with business transactions: Keep owner draws and personal expenses separate.
• Not being consistent: Frequent changes with names or numbers make trend analysis tough.

Keep your Chart of Accounts up-to-date

And schedule a regular review — every quarter or year is a good frequency — to make sure accounts continue to reflect the way the business operates. Close the unused, merge any duplicates, and add new accounts only when there’s a repeated need. An organized chart of accounts eases audits and tax prep.

When to Seek Outside Help

Once your transactions start getting complex (when you add multiple locations, inventory layers or investor reporting), it’s a good idea to hire an accountant who can help design the chart of accounts to be scalable. A professional can assist with setting up classes or segments for tracking by location, department or product line.

Final Checklist Before You Start

• A main title and subtitle appear at the top of your chart notes. 
• Account numbers are easy to predict.
• Names have meaning and provide information.
• Subaccounts are a clear, minimal set that make sense for your program area.
• The chart is regularly reviewed and updated/adjusted.

A useful chart of accounts is not something you set and forget; it’s a living tool that changes as your business does. Begin with basic setup and sample chart of accounts template since every company is different, and so your needs may vary. Provided that you discipline yourself with categories, your financial reports are a pwerful tool for growth and making better decisions.