Lesson 3 of 12

In this lesson you will:

Explain what a chart of accounts is and how it is organized.
Use a simple numbering scheme for the five account types.
Decide how detailed your accounts should be.
Avoid the setup mistakes that make reports hard to use.

What it is

The chart of accounts is the list of all the accounts a business uses to sort its transactions. Every debit and credit lands in one of them. The balance sheet is built from the asset, liability and equity accounts; the profit and loss statement from the income and expense accounts.

Accounts are listed in a fixed order, the same order the financial statements use: assets, liabilities, equity, income, cost of goods sold, expenses. Many businesses number them so the order is obvious and each account has a short code.

A common numbering scheme

Range	Type	Appears on
1000 to 1999	Assets	Balance sheet
2000 to 2999	Liabilities	Balance sheet
3000 to 3999	Equity	Balance sheet
4000 to 4999	Income	Profit and loss
5000 to 5999	Cost of goods sold	Profit and loss
6000 to 6999 (and up)	Expenses	Profit and loss

Leave gaps between numbers (1010, 1020, 1030) so you can add accounts later in the right place. Numbering is optional; what matters is that the list is organized and consistent.

Sample chart for a small service business

Number	Account	Type	Used for
1010	Business chequing	Asset (bank)	The main operating account
1020	Business savings	Asset (bank)	Tax and emergency reserve
1200	Accounts receivable	Asset	Invoices customers have not paid yet
1500	Equipment	Fixed asset	Tools and computers kept for years
1510	Accumulated depreciation	Fixed asset (contra)	Wear on the equipment so far
2000	Accounts payable	Liability	Supplier bills not paid yet
2100	Business credit card	Liability (credit card)	The card balance owed
2200	Sales tax or GST/HST payable	Liability	Tax collected, owed to the government
2300	Payroll liabilities	Liability	Withholdings and employer taxes not yet remitted
3000	Owner contributions	Equity	Money the owner put in
3100	Owner draws	Equity	Money the owner took out
3900	Retained earnings	Equity	Past years' profits kept in the business
4000	Service income	Income	Fees charged to customers
6000	Advertising	Expense	Ads, listings, printing
6100	Bank and card fees	Expense	Monthly fees, merchant fees
6200	Insurance	Expense	Liability and vehicle insurance
6300	Office supplies	Expense	Paper, ink, small items
6400	Rent	Expense	Office or shop rent
6500	Vehicle expenses	Expense	Fuel, repairs, parking
6600	Wages	Expense	Gross pay of employees
6610	Payroll taxes	Expense	The employer's share of payroll taxes

A business that sells goods adds an inventory asset account (often 1300) and cost of goods sold accounts in the 5000s. A business with a loan adds a loan liability account.

How detailed should it be?

Detailed enough to answer the questions you and your tax return ask, and no more. A good test is the tax form you file. A US sole proprietor reports expenses by line on Schedule C (advertising, car and truck expenses, insurance, rent, supplies, and so on); a Canadian sole proprietor uses the expense lines of form T2125. If each expense account maps cleanly to one line, year end is easy.

Subaccounts help when you want detail without clutter. Vehicle expenses can have Fuel, Repairs and Insurance under it: the profit and loss shows the total, and you can expand it when you want the detail.

Common mistakes

An account for each customer or supplier. Use customer and vendor lists instead. One accounts receivable account, with customers tracked inside it, is how double-entry systems are designed.
A Miscellaneous account that keeps growing. If more than a small share of your expenses land there, create the accounts they really belong to.
Deleting accounts that have history. Mark them inactive instead, so old reports still add up.
Mixing personal spending into expense accounts. Personal spending paid from the business account is an owner draw, not an expense.
Leaving opening balance equity unexplained. When you start mid-life, opening balances go to an opening balance equity account. Your accountant should move that to the proper equity accounts once the opening figures are confirmed.

Worked example: where does it go?

Transaction	Debit	Credit
Pay $120 for a newspaper ad from chequing	6000 Advertising	1010 Business chequing
Buy a $1,400 laptop on the business card	1500 Equipment	2100 Business credit card
Owner takes $800 for personal use	3100 Owner draws	1010 Business chequing
Invoice a client $2,500 plus $125 GST	1200 Accounts receivable ($2,625)	4000 Service income ($2,500) and 2200 GST/HST payable ($125)

Notice the last one: an entry can have more than two lines, as long as debits ($2,625) equal credits ($2,500 + $125).

Key terms

Try it

Free chart of accounts template: A numbered starter chart to adapt.
Chart of accounts for small business (guide): More sample charts by type of business.
Accounting software for the self-employed: A simpler setup for a one-person business.

Practise in AcboBooks: every new company starts with a ready-made chart of accounts that you can rename, add to and mark inactive. Compare it with the sample above. Free 15-day trial.

Check your understanding

4 questions · pass with 3 right

Pick an answer to see if it is right and why. Nothing is sent anywhere; your result is kept in this browser.

1. In a common numbering scheme, which range holds liabilities?

2. Where should you track what each customer owes?

3. An old expense account has transactions from last year but you no longer use it. What should you do?

4. The owner pays a family grocery bill from the business account. Which account gets the debit?

0 of 4 answered.

Part of Bookkeeping Basics, a free course from AcboBooks LLC. General information, not tax, legal or accounting advice. Last reviewed October 25, 2026.