What Is a Chart of Accounts and How Should You Set One Up?

What a chart of accounts is

A chart of accounts is a list. Each line is a bucket, and each bucket has a name and a type. When a dollar comes in or goes out, it goes into one of these buckets. Sales go to a sales account. Rent goes to a rent account. The whole set of buckets is the chart of accounts.

Every report you run is built from this list. Your profit and loss is the income and expense buckets added up. Your balance sheet is the asset, liability and equity buckets added up. If the buckets are messy, every report is messy too.

How it is built

A chart of accounts has a few main types. Income accounts hold the money you earn. Expense accounts hold the costs of running the business. Asset accounts hold what you own, like cash and equipment. Liability accounts hold what you owe, like loans and unpaid bills. Equity accounts hold what you have put in or taken out of the business.

Most software starts you with a basic chart of accounts. You add buckets as you need them and you remove the ones you never use. The goal is not to have a lot of accounts. The goal is to have the right accounts for your business, and no more.

How to set one up

• Start with the accounts the software gives you.
• Add an income account for each kind of sale you make.
• Add an expense account for each kind of cost you have.
• Add bank and card accounts for every account you actually use.
• Add a loan account for each loan you owe.
• Remove accounts you will never use, so the list stays short.
• Name each one in plain words you will still understand next year.

Keep it simple

The most common mistake is too many accounts. An owner adds a new account for every small thing, and the list grows until no one can read it. A short chart of accounts is easier to keep clean, easier to reconcile, and easier to read on a report.

Another common mistake is too few accounts. If everything goes into one or two buckets, the reports stop telling you anything useful. The balance is in between, enough accounts to answer your questions, and no more than that.

A made up example for teaching

How we do it

We are QuickBooks Online Accountants (QBOA), so we work in the accountant side of QuickBooks Online every day. We work in Xero too. We work inside your QuickBooks Online or Xero file. You do not have to switch. If you already use one of them, we log in there and do the work. If you have no software yet, we help you set one up, and that includes setting up the chart of accounts.

We start with clean and reconciled books. That means we reconcile every account and sort every transaction before we move forward. We use read only access and we never ask for your bank password.

Then we close each month by the 10th. We categorize and reconcile in the first week. We send you one list of questions on day 8. We lock the period on day 10 and send your reports. The monthly routine matters more than the brand. Reconciled accounts, the same categories every time, and a month end close are what make the books trustworthy.

Mistakes we fix

• Too many accounts, so the list is unreadable.
• Too few accounts, so the reports stop being useful.
• An account for every little thing, when a few would do.
• A chart of accounts that grew over years and never got cleaned up.
• Sorting the same kind of transaction into a different bucket each month.

What we do

We do monthly bookkeeping, and only bookkeeping. We work in QuickBooks Online or Xero, we keep your chart of accounts clean, we close your books by the 10th, and we hand clean reports to your CPA at year end. Book a free 20 minute call and we will help you set up a chart of accounts that fits your business.

Questions people ask

Can I change my chart of accounts later? Yes. You can add, rename or merge accounts as your business changes. We help you do it without breaking the old reports.

How many accounts should I have? Enough to answer your questions, and no more. Most small businesses do well with a short list. We help you find the right length.

Do I have to switch software? No. We work inside your existing QuickBooks Online or Xero file. If you have no software yet, we help you set one up.

Will you set up the chart of accounts for me? Yes. If you are starting fresh, we set up the chart of accounts as part of the setup. If you already have one, we clean it up.