Chart of Accounts: Numbering, Structure and Example

A chart of accounts is the numbered list of every account a business uses to record transactions, grouped into five types: assets, liabilities, equity, revenue and expenses. Each account gets a name and a code, such as 1200 Accounts Receivable. Your software posts every invoice, bill and payment to these accounts, and your financial statements are built from their balances.

This guide shows you how to design one from scratch: which account types you need, how to number them so the list can grow, a full sample chart for a small service business, and how invoices flow into the accounts. If you are new to the underlying system, read our guide to double-entry bookkeeping first, because every account in the chart works on debits and credits.

What a chart of accounts does

Every transaction has to land somewhere. When you send a client an invoice for $2,000, your books need to know that receivables went up and revenue went up. When you pay rent, cash goes down and rent expense goes up. The chart is the menu of places a transaction can land.

It does three jobs:

• Organizes the ledger. The general ledger holds one page (or one filtered view) per account. The chart determines what those pages are.
• Drives your reports. The balance sheet is built from asset, liability and equity accounts. The profit and loss statement is built from revenue and expense accounts. If an account is miscategorized, the reports are wrong.
• Supports tax filing. When expense accounts line up with the categories on your tax return, year-end preparation becomes a matter of copying totals rather than re-sorting a year of receipts.

The five account types and their normal balances

Every account belongs to one of five types. The type decides which financial statement it appears on and whether it normally carries a debit or credit balance.

Type	What it records	Normal balance	Statement
Assets	What the business owns or is owed: cash, receivables, equipment, prepayments	Debit	Balance sheet
Liabilities	What the business owes: supplier bills, loans, tax collected, accrued costs	Credit	Balance sheet
Equity	The owner's stake: capital introduced, drawings, retained earnings	Credit	Balance sheet
Revenue	Income earned from sales, services, fees and interest	Credit	Profit and loss
Expenses	Costs of earning revenue and running the business	Debit	Profit and loss

Many charts split expenses into two groups: cost of goods sold (direct costs that rise with each sale, such as materials or subcontractors) and operating expenses (overheads such as rent, software and insurance). That split lets you calculate gross profit.

Account numbering: a system that scales

Account numbering is what keeps a growing list readable. The most widely used convention assigns each type a block of numbers:

Range	Account type	Typical sub-ranges
1000-1999	Assets	1000s cash, 1100-1300 receivables and prepayments, 1500s fixed assets
2000-2999	Liabilities	2000s payables and accruals, 2200s taxes payable, 2700s long-term loans
3000-3999	Equity	Owner's capital, drawings or dividends, retained earnings
4000-4999	Revenue	Service income, product sales, other income
5000-5999	Cost of goods sold	Materials, subcontractors, freight in
6000-7999	Operating expenses	Rent, wages, software, marketing, travel
8000-8999	Other income and expense	Interest, gains and losses, income tax

Four rules make the numbering work long term:

1. Leave gaps. Number accounts in steps of 10 (6100, 6110, 6120) so you can add 6115 later without renumbering anything.
2. Order by liquidity within assets and liabilities. Cash first, then receivables, then longer-term items. This mirrors the balance sheet layout.
3. Use sub-accounts sparingly. A parent account such as 6200 Software with children for each tool is useful only if you will actually review those totals.
4. Keep the numbers stable. Staff, your accountant and saved reports all refer to codes. Changing 6100 from Rent to Wages mid-year causes confusion.

The ranges are a convention, not a legal requirement. Some software uses five-digit codes, and some industries follow their own schemes. Pick one and apply it consistently.

Chart of accounts example for a small business

Here is a sample chart for a small design and marketing studio that bills clients by invoice, holds a little equipment and has one loan. It has 38 accounts, which is typical for a business of this size.

Code	Account name	Type
1000	Business Checking	Asset
1010	Business Savings	Asset
1050	Payment Processor Clearing	Asset
1200	Accounts Receivable	Asset
1300	Prepaid Expenses	Asset
1500	Computer Equipment	Asset
1510	Accumulated Depreciation, Equipment	Asset (contra)
1520	Furniture and Fittings	Asset
2000	Accounts Payable	Liability
2050	Business Credit Card	Liability
2100	Accrued Expenses	Liability
2150	Deferred Revenue	Liability
2200	Sales Tax Payable	Liability
2250	Payroll Liabilities	Liability
2700	Bank Loan	Liability
3000	Owner's Capital	Equity
3100	Owner's Drawings	Equity
3200	Retained Earnings	Equity
4000	Design Services Income	Revenue
4100	Retainer Income	Revenue
4200	Reimbursed Expenses Income	Revenue
4900	Discounts Given	Revenue (contra)
5000	Subcontractor Costs	Cost of sales
5100	Stock Images and Fonts	Cost of sales
5200	Printing for Clients	Cost of sales
6000	Wages and Salaries	Expense
6050	Employer Payroll Taxes	Expense
6100	Rent	Expense
6150	Utilities and Internet	Expense
6200	Software Subscriptions	Expense
6250	Insurance	Expense
6300	Marketing and Advertising	Expense
6400	Travel and Meals	Expense
6500	Accounting and Legal Fees	Expense
6600	Bank and Payment Fees	Expense
6700	Depreciation Expense	Expense
8000	Interest Expense	Other expense
8100	Interest Income	Other income

A few choices in this sample are worth copying. The payment processor clearing account (1050) holds card receipts until the processor pays out, net of fees, which makes bank reconciliation far easier. Contra accounts (1510 and 4900) keep the original amounts visible while still reducing the totals. And separate liability accounts for accrued expenses and deferred revenue are ready for month-end adjustments, even if you only use them a few times a year.

How to set up your chart of accounts step by step

1. Start from your software's default. Most accounting apps generate a list based on your industry. Export it so you can review it in a spreadsheet.
2. List how you earn money. Create one revenue account per income stream you want to track separately, such as project fees, retainers and product sales. Avoid one account per client; use customer reports for that.
3. Match expenses to your tax return. Put the expense lines from your business tax return next to your accounts and make sure each line has a home.
4. Add balance sheet accounts for what you actually hold. One account per bank account, card and loan, plus receivables, payables and any tax you collect.
5. Number using ranges with gaps, as described above.
6. Deactivate what you will not use. Fewer choices mean fewer miscodings.
7. Write a one-line description for each account so anyone posting transactions knows what belongs there.
8. Review after three months and again at year end, once you see which accounts are crowded and which are empty.

Worked example: how an invoice moves through the accounts

Suppose the studio above invoices a client $2,000 for a logo project plus 8% sales tax, so the invoice total is $2,160. The journal entry on the invoice date is:

Account	Debit	Credit
1200 Accounts Receivable	$2,160
4000 Design Services Income		$2,000
2200 Sales Tax Payable		$160

Two weeks later the client pays by card. The processor deposits $2,097.36 after a fee of $62.64. The entry records the full amount clearing receivables and the fee as an expense:

Account	Debit	Credit
1000 Business Checking	$2,097.36
6600 Bank and Payment Fees	$62.64
1200 Accounts Receivable		$2,160.00

Because the chart has separate accounts for revenue, tax and fees, the profit and loss shows $2,000 of income and $62.64 of fees, and the balance sheet shows $160 owed to the tax authority. If everything had gone into one income account, revenue would be overstated and the tax liability invisible. Our journal entries guide walks through the rest of the invoice lifecycle, including credit notes and bad debts.

How the accounts roll up into your reports

At the end of a month, each account's balance feeds one line, or part of one line, in the financial statements. Suppose the studio's revenue and expense accounts show these totals for October:

Profit and loss line	Accounts included	October
Revenue	4000, 4100, 4200 less 4900	$18,400
Cost of sales	5000, 5100, 5200	($4,100)
Gross profit		$14,300
Operating expenses	6000 to 6700	($10,250)
Interest	8000 less 8100	($180)
Net profit		$3,870

The account numbering does the grouping for you: everything in the 5000s is cost of sales, everything in the 6000s is overhead. If someone posts a subcontractor bill to 6300 Marketing, gross profit is overstated and overheads look bloated. Clear ranges make that kind of mistake easier to spot. The balance sheet works the same way, with the 1000s, 2000s and 3000s rolling up into assets, liabilities and equity, as shown in our small business balance sheet guide.

Tailoring the chart to your type of business

Business	Accounts to add or emphasize
Solo freelancer	One income account per service line, home office costs, equipment, owner's drawings; often 20 to 25 accounts in total
Agency or studio	Subcontractor costs in cost of sales, retainer income, deferred revenue for prepaid work
Retail or e-commerce	Inventory asset, cost of goods sold, freight in, merchant fees, returns and allowances
Construction trades	Materials, job costs, retention receivable and payable, equipment hire
Company with shareholders	Share capital, dividends, retained earnings rather than drawings, corporate tax payable

The equity section changes most by entity type. Sole traders and partners use capital and drawings accounts. Corporations use share capital and retained earnings, which accumulate profit not paid out as dividends.

Keeping the chart clean over time

Charts tend to grow messy as people add accounts on the fly. A light set of rules prevents that:

• One owner. Only the bookkeeper or owner adds or renames accounts.
• Add for a reason. A new account should answer a question you will ask repeatedly, such as how much you spend on contractors.
• Use classes, tags or projects for dimensions. Track clients, locations or departments with your software's tagging features instead of duplicating accounts.
• Retire, do not delete. Mark old accounts inactive so historical reports still work.
• Review yearly. Before closing the year, look for accounts with tiny balances, catch-all accounts that have grown too large, and anything named "Miscellaneous" holding more than a small share of expenses.

Common mistakes

• Recording sales tax as income. It belongs in a liability account until you pay it over.
• Creating an account per customer or supplier. Use the receivables and payables sub-ledgers instead.
• Mixing personal and business items. Owner payments go to drawings, not to an expense account.
• Expensing equipment that should be an asset. Larger purchases often need to be capitalized and depreciated; check your capitalization threshold with your accountant.
• Too much detail too early. Start lean and split an account only when the total is large enough to need it.

Next step

A well-structured chart of accounts makes every later step easier, from the trial balance to the year-end accounts. It also depends on clean source documents. Every invoice you issue should carry a unique number, a clear tax line and the correct totals, so it posts to the right accounts first time. Create professional invoices with our free invoice generator, and keep your numbering consistent with the invoice number generator. For more accounting walkthroughs, browse our guides.