How to Set Up a Chart of Accounts for Your Small Business

What a chart of accounts actually is

A chart of accounts is the list of buckets your accounting software uses to categorize every transaction. Every dollar that hits your books goes into one bucket. The buckets are organized into five main categories:

• Assets — what you own (cash, A/R, inventory, equipment)
• Liabilities — what you owe (A/P, loans, credit cards, sales tax payable)
• Equity — owner's stake (contributions, draws, retained earnings)
• Revenue — income from sales and services
• Expenses — costs of running the business (COGS, payroll, rent, overhead)

Every account in your chart belongs to one of these five categories. The Balance Sheet shows assets, liabilities, and equity. The Profit & Loss shows revenue and expenses.

The biggest setup mistake: too many accounts

Default QuickBooks setups often include 80–100 accounts. Add a few years of "I'll just create a new account for this transaction" and you're at 200–300. The result: nobody knows which account to use, similar transactions get split across multiple accounts, and your P&L becomes unreadable.

Most small businesses need 40–80 accounts total. The principle: accounts should represent categories you care about for decision-making, not levels of detail you only need at the transaction level.

How to think about categorization depth

The test for whether something deserves its own account: would you make a different decision if you knew this number separately?

• "Software Subscriptions" as a single account → good (you can see software spending at a glance)
• "QuickBooks Subscription" and "Slack Subscription" and "Zoom Subscription" as separate accounts → bad (you'll never act on these individually)

If you want to see detail on a particular vendor, use the vendor field, not a separate account. Reports can break down spending by vendor without polluting the chart of accounts.

A baseline chart of accounts for a small service business

Here's a workable starting structure. Adapt to your industry, but use this as a sanity check on what "enough" looks like.

Assets

• Operating Checking
• Savings
• Accounts Receivable
• Undeposited Funds (set up by QuickBooks automatically)
• Prepaid Expenses
• Fixed Assets (with sub-accounts for major categories — Equipment, Computers, Furniture)
• Accumulated Depreciation

Liabilities

• Accounts Payable
• Credit Card (one per card)
• Sales Tax Payable
• Payroll Liabilities
• Customer Deposits / Deferred Revenue
• Loans Payable (one per loan)

Equity

• Owner's Contributions
• Owner's Draws
• Retained Earnings (set up by QuickBooks automatically)
• Net Income (set up by QuickBooks automatically)

Revenue

• Service Revenue (or break into 2–4 service categories that mean something for your business)
• Product Revenue (if applicable)
• Other Income
• Refunds and Discounts (contra-revenue)

Cost of Goods Sold (if applicable)

• Direct Labor
• Materials / Inventory Used
• Subcontractor Costs
• Direct Other (job-specific costs)

Operating Expenses

• Advertising and Marketing
• Bank Fees
• Computer and Internet
• Continuing Education
• Contractor Labor
• Dues and Subscriptions
• Insurance — General Liability
• Insurance — Workers' Compensation
• Insurance — Health Benefits
• Meals (50% deductible)
• Office Supplies
• Payroll — Wages
• Payroll Taxes
• Postage and Shipping
• Professional Fees (legal, accounting)
• Rent
• Repairs and Maintenance
• Software and Apps
• Telephone
• Travel
• Utilities
• Vehicle Expenses
• Other Operating Expenses

Other Income / Expenses

• Interest Income
• Interest Expense
• Depreciation Expense

That's about 50–60 accounts total — enough granularity to produce meaningful reports without the bloat that makes books unmanageable.

Industry-specific additions

Different industries need different additions to this baseline:

Construction

Heavy on Cost of Goods Sold (labor, materials, subs, permits broken out), job-specific expense tracking, and equipment categories. See our construction bookkeeping guide.

Restaurant

Separate revenue for food, beer/wine, liquor, and other. Matching COGS categories. Daily Sales Summary entries. Tip liabilities and credit card tip handling.

E-commerce

Multiple revenue lines by sales channel. Processor fees broken out. Inventory asset tracking. Marketplace fees by platform.

Medical / dental

Production revenue separated from insurance adjustments. Provider compensation broken out from staff payroll. Lab fees, supplies, and equipment categories.

Real estate (investor)

Use the Class or Location feature for each property rather than separate accounts. Standard rental real estate accounts (rents collected, repairs, property taxes, mortgage interest, depreciation).

Setting up account numbers (or skipping them)

Some businesses use account numbers (1000s for assets, 2000s for liabilities, etc.) and some don't. QuickBooks Online lets you enable or disable numbers. Pros and cons:

• With numbers: easier to sort accounts in a custom order, looks more "professional," matches what accountants expect
• Without numbers: simpler for non-accountants, less to maintain, alphabetical sorting works fine for most small businesses

For most small businesses we work with, numbers don't add much. Pick whichever you prefer and be consistent.

Sub-accounts: when they help and when they hurt

Sub-accounts let you nest detail under a parent account. Used well, they group related accounts in reports. Used poorly, they create the same bloat problem as too many top-level accounts.

Good use of sub-accounts:

• "Insurance" with sub-accounts for "General Liability," "Workers' Comp," "Professional Liability" — they roll up cleanly on the P&L
• "Fixed Assets" with sub-accounts for "Equipment," "Vehicles," "Computers"

Bad use:

• "Office Supplies" with sub-accounts for "Pens," "Paper," "Printer Ink" — categories you'll never actually use for anything

Cleaning up an existing chart of accounts

If your current chart is bloated, the cleanup process:

1. Run a chart of accounts report sorted by account
2. Identify accounts with no activity in the last 12 months — mark for archive
3. Identify duplicate or near-duplicate accounts ("Office Supplies" and "Office Expense") — merge into one
4. Identify accounts that should really be vendors or items, not accounts — reclassify
5. Identify accounts where the activity belongs somewhere else — reclassify transactions, then archive

QuickBooks doesn't let you delete accounts with historical transactions, but you can archive (deactivate) them so they stop appearing in dropdowns. The historical transactions stay intact.

Frequently asked questions

How we help

For new clients, restructuring the chart of accounts is usually part of onboarding. For existing books that have grown unwieldy, chart of accounts cleanup is one piece of our QuickBooks cleanup service.

Talk to us about your books →