How to set up a simple chart of accounts
A chart of accounts is the list of categories your books sort every transaction into, grouped as assets, liabilities, equity, income and expenses. Keep it short, around 30 to 50 accounts for most small businesses, and match the expense categories to your tax return so year-end work stays simple.
Updated November 2026 · By Pankil Kumar, Managing Partner
Quick facts
- Five groups. Assets, liabilities, equity, income and expenses
- Size. Around 30 to 50 accounts suits most small businesses
- Golden rule. Line expenses up with your tax return categories
What goes in a chart of accounts?
Every account sits in one of five groups. The first three build your balance sheet, and the last two build your profit and loss statement.
| Group | Examples |
|---|---|
| Assets | Checking, savings, receivables, equipment |
| Liabilities | Credit cards, loans, sales tax payable, payroll liabilities |
| Equity | Owner contributions, owner draws, retained earnings |
| Income | Service revenue, product sales, refunds |
| Expenses | Rent, software, insurance, advertising, contractors |
How many accounts do you actually need?
Fewer than you think. If an account gets two transactions a year, roll it into something else. Software usually starts you with a default list that's too long, so turn off what you don't use. A long chart slows everyone down and makes reports harder to read.
The test is simple. Would you make a different decision if you saw this number on its own? If yes, keep the account. If not, merge it.
How should you set up expenses?
Start with the lines on your tax return, such as Schedule C or Form 1120-S, then add detail only where it helps. A restaurant wants food, beverage and labor separate. A contractor wants materials and subcontractors. A consultant may only need software, travel and marketing.
Keep meals on their own line, since meals are generally only 50% deductible. Don't bury them in "Office expenses."
What mistakes should you avoid?
- Using "Miscellaneous" or "Ask my accountant" as a permanent home
- Recording owner draws as an expense
- Deleting accounts that have history, instead of hiding them
- Creating one account per vendor, when a vendor list does that job
- Putting loan payments in expenses, when the principal reduces a liability
If your chart has grown wild, cleaning it is usually a short job. Tell your bookkeeper before year end so reports stay comparable. If you're still choosing software, read QuickBooks Online vs Xero.
Sources
- IRS Publication 583: Starting a business and keeping records
- IRS Publication 334: Tax guide for small business
General information, not tax advice for your situation.
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See our bookkeeping serviceCan I change my chart of accounts later?
Yes. Most changes are easy, but merge or hide accounts rather than deleting them, and try to do it between reporting periods.
Does the IRS require a specific chart of accounts?
No. You can use your own categories, as long as your records support the return you file.
What is the difference between a chart of accounts and a general ledger?
The chart is the list of categories. The general ledger is the record of every transaction posted to those categories.
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