Chart of Accounts Explained

What Is a Chart of Accounts?

A chart of accounts (COA) is a complete list of every account used to record financial transactions in your business. Think of it as the filing system for your finances — every time money comes in or goes out, it gets categorised into one of these accounts.

Your chart of accounts is the backbone of your bookkeeping system. It determines how your financial reports are structured, what level of detail you can see in your profit and loss statement and balance sheet, and how easily you can track where your money is going.

Every business, no matter how small, has a chart of accounts — even if it is an informal one. A freelancer who tracks "income" and "expenses" in a spreadsheet is effectively using a very simple chart of accounts. As your business grows, you will need more detail and structure.

The Five Account Categories

Every account in your chart falls into one of five fundamental categories. Understanding these categories is essential for making sense of your financial position.

1. Assets

Assets are things your business owns that have value. They are split into current assets (cash, accounts receivable, inventory — things that can be converted to cash within a year) and non-current assets (equipment, vehicles, property — things you hold for longer than a year).

• Cash and bank accounts
• Accounts receivable (money clients owe you)
• Inventory
• Equipment and machinery
• Prepaid expenses (e.g., annual software subscriptions paid upfront)

2. Liabilities

Liabilities are what your business owes. Like assets, they are divided into current liabilities (due within a year) and long-term liabilities (due after more than a year).

• Accounts payable (bills you owe to suppliers)
• Credit card balances
• Loans and mortgages
• VAT/GST/sales tax owed
• Accrued expenses (costs incurred but not yet paid)

3. Equity

Equity represents the owner's stake in the business — essentially, what would be left if you sold all assets and paid off all liabilities. For sole traders, this is straightforward. For companies with shareholders, it includes share capital and retained earnings.

• Owner's equity / capital
• Retained earnings (accumulated profits not yet distributed)
• Owner's drawings (money taken out of the business by the owner)

4. Revenue (Income)

Revenue accounts track the money your business earns. You might have a single revenue account or several, depending on how much detail you need.

• Sales revenue / service income
• Interest income
• Rental income
• Other income (e.g., refunds received, asset sales)

5. Expenses

Expenses are the costs of running your business. This is usually the largest section of the chart of accounts, because most businesses benefit from tracking expenses in detail.

• Rent and utilities
• Salaries and wages
• Marketing and advertising
• Software and subscriptions
• Travel and transport
• Professional services (accounting, legal)
• Office supplies
• Insurance
• Depreciation

How to Structure Your Chart of Accounts

Most businesses use a numbering system to organise their accounts. The standard approach assigns a range of numbers to each category:

This numbering system gives you plenty of room to add new accounts as your business evolves. Leave gaps between account numbers so you can insert new accounts in logical positions without renumbering everything.

Chart of Accounts Example

Here is a simple chart of accounts for a small freelance or consulting business:

This is a starting point — tailor it to your specific business. A photographer might add accounts for equipment hire and printing costs. A consultant might add separate revenue accounts for different service types. The key is to have enough detail to be useful without creating so many accounts that bookkeeping becomes a chore.

Tips for Setting Up Your Chart of Accounts

• Start simple. You can always add more accounts later. Beginning with too many categories creates unnecessary work and often leads to miscategorised transactions.
• Use clear, descriptive names. "Marketing & Advertising" is better than "Account 5200." Anyone looking at your books should understand what each account is for.
• Think about your reports. Your chart of accounts determines the line items on your profit and loss statement and balance sheet. Set up accounts based on what information you want to see in those reports.
• Align with your tax return. If your tax return has specific expense categories, match your chart of accounts to them. This makes tax filing much simpler.
• Review annually. At the end of each year, look at your chart of accounts. Remove any accounts you did not use and add any you found yourself needing.
• Leave room to grow. Use the numbering gaps to insert new accounts later without disrupting your existing structure.

Common Mistakes to Avoid

• Creating too many accounts. More is not always better. If you have 50 expense accounts and most of them have only one or two transactions a year, consolidate them.
• Not using accounts consistently. If you log a software expense under "Office Supplies" one month and "Software & Subscriptions" the next, your reports become unreliable. Pick one and stick with it.
• Ignoring the structure. Dumping everything into a catch-all "Miscellaneous" account defeats the purpose. If a transaction does not fit an existing account, create a proper one for it.
• Not separating personal and business. Your chart of accounts should only contain business accounts. Personal expenses should never appear in your business books.
• Forgetting to set up sub-accounts. If you need more granularity within a category (for example, breaking down "Marketing" into "Digital Ads" and "Print Materials"), use sub-accounts rather than creating unrelated top-level accounts.

Generate a Chart of Accounts

Want a ready-made chart of accounts tailored to your business type? Use our free Chart of Accounts Generator to create a customised starting point for your bookkeeping. Select your industry, answer a few questions, and get a downloadable chart of accounts in seconds.