Understanding Your Chart of Accounts: A Comprehensive Guide

Andrew Schliesman
Aug 18
4 min read

Updated: Sep 4

What is a Chart of Accounts?

The COA is your bookkeeping “map.” It is the structured list of account names and numbers to which your transactions are posted. Each account rolls up to your financial statements—Balance Sheet and Profit & Loss—so owners, lenders, and your tax professional can read your numbers without guesswork.

The Five Core Buckets (and What Goes Where)

Assets (1000–1999): This category includes cash, bank accounts, accounts receivable, inventory, equipment, and prepaid expenses.
Liabilities (2000–2999): This encompasses credit cards, loans, accounts payable, sales tax payable, and payroll liabilities.
Equity (3000–3999): This includes owner’s equity, member distributions, and retained earnings.
Income (4000–4999): This category comprises sales, service revenue, product revenue, and other income.
Cost of Goods Sold (5000–5999): This includes direct costs tied to revenue, such as materials, subcontractors, and merchant fees if directly tied to sales.
Expenses (6000–9999): This encompasses operating costs like advertising, software, rent, utilities, payroll, travel, and insurance.

Account Numbering That Works

A simple numbering system makes reporting, sorting, and imports easier. One popular approach is as follows:

1000–1999: Assets
2000–2999: Liabilities
3000–3999: Equity
4000–4999: Income
5000–5999: COGS
6000–7999: Operating Expenses
8000–8999: Other Income
9000–9999: Other Expenses

Inside each range, leave “gaps” for future accounts. For example:

1010: Checking – Operating
1020: Savings – Tax Reserve
1210: Accounts Receivable
2000: Accounts Payable
2100: Credit Card – Amex
3100: Owner’s Equity
4100: Service Revenue
5110: Materials – Direct
6120: Software Subscriptions

Subaccounts: When (and When Not) to Use Them

Use subaccounts to group details you will review.

Good Example: “Travel” with subaccounts for “Airfare,” “Lodging,” and “Meals.”
Overkill Example: Dozens of subaccounts for every software tool you have ever tried.

Build a COA That Matches Your Business Model

Service-Based (Consulting, Tax Prep, Design)

Income: 4100 Service Revenue; 4200 Project Revenue; 4300 Training/Workshops
COGS (if applicable): 5100 Subcontractors; 5200 Course Materials
Expenses: 6100 Advertising; 6120 Software; 6200 Professional Fees; 6300 Insurance; 6400 Travel; 6500 Office

Product/Retail/E-commerce

Income: 4100 Product Sales; 4200 Shipping Income
COGS: 5100 Inventory Purchases; 5200 Freight-In; 5300 Packaging
Expenses: 6110 Marketplace/Platform Fees; 6120 Software; 6200 Advertising

Contractors/Trades/Real Estate

Income: 4100 Contract Revenue; 4200 Change Orders/Other
COGS: 5100 Materials; 5200 Subcontractors; 5300 Equipment Rental
Expenses: 6120 Software; 6300 Insurance & Bonds; 6400 Vehicle

Sample “Lean” Starter COA (Service Business)

Assets

1010: Checking – Operating
1020: Savings – Tax Reserve
1210: Accounts Receivable
1410: Prepaid Expenses
1500: Equipment (Fixed Asset)

Liabilities

2000: Accounts Payable
2100: Credit Card – (Bank Name)
2300: Sales Tax Payable (if required)

Equity

3100: Owner’s Equity
3200: Owner Draws/Distributions
3900: Retained Earnings

Income

4100: Service Revenue
4200: Training/Workshops
4800: Other Income

COGS

5100: Subcontractors
5200: Direct Materials

Expenses

6100: Advertising & Marketing
6120: Software Subscriptions
6200: Professional Fees
6300: Insurance
6400: Travel
6500: Office Supplies
6600: Utilities & Internet
6700: Bank & Processing Fees
6800: Taxes & Licenses
6900: Miscellaneous

Common COA Mistakes (and Quick Fixes)

Too Many Accounts: This makes it hard to read and harder to maintain.

Fix: Consolidate infrequently used accounts. Keep detail in classes, locations, or items instead of endless accounts.

Misclassified COGS vs. Expenses: This distorts gross margin.

Fix: Only include direct, revenue-generating costs in COGS.

Personal Expenses Mixed In: This leads to messy books and potential tax risk.

Fix: Use separate bank and credit cards. Utilize an “Owner Draw” account for any personal transfers.

Multiple Near-Duplicate Accounts: For instance, “Dues & Subscriptions” vs. “Subscriptions.”

Fix: Merge duplicates while keeping the clearer name.

Balance Sheet Neglect: Old credit card balances or loans may never be reconciled.

Fix: Reconcile monthly and tie loans to amortization schedules.

Monthly & Quarterly COA Tune-Up (Checklist)

Reconcile all bank, credit card, and loan accounts.
Review uncategorized or “ask-my-accountant” accounts and clear them.
Scan P&L for tiny or duplicate accounts and consolidate.
Confirm COGS vs. Expenses placements.
Review Sales Tax Payable and Payroll Liabilities for accuracy.
Make dormant accounts inactive to reduce clutter while keeping history.
Document any changes to the COA.

COA & Taxes: Make April Easy

Map your P&L categories to your tax form (Schedule C, 1120S, etc.).
Keep owners’ draws and distributions out of expenses, as they are equity.
Use separate lines for meals, vehicle, and home office to facilitate substantiation.
Track 1099-NEC-eligible vendor payments via clear accounts or vendor tags.

When to Update Your COA

When you add or drop a product line or service offering.
If you hire subcontractors or start holding inventory.
When your bank or processor changes fee structures.
If you are consistently using an “Other” bucket, create or rename a proper account.

Final Takeaway

A clean, purposeful COA makes your financials easier to read, your margins easier to manage, and your taxes faster to prepare. Start lean, evolve as needed, and review it like a playbook—because that’s precisely what it is.

By maintaining an effective Chart of Accounts, you can ensure that your financial records are accurate and ready for any tax season. This is essential for navigating the complexities of financial management and achieving your business objectives.