How to Develop a Chart of Accounts for Bookkeeping

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A chart of accounts for a small business is basically an index of all of the accounts where the financial information of the company is kept. Account names and numbers where the financial transactions of a company are recorded so it is imperative to set it up before you start composing the general ledger. Setting up a chart should be the number one priority for a new business that is setting up it’s bookkeeping system. Depending on the scale of your business, items are included in the chart of accounts. An inventory account is a must have for a manufacturing business, however, it will not be used for a service-based business.

When setting up an accounts chart, you must think long term. Think of any possible scenarios that could happen 5 years down the road. As you go along, you will have to add new accounts to the chart because the number of employees and scale of your business eventually increases. Making up the accounts chart requires you to assign a block of numbers to each account and leave blank spaces for the ones to be added on later. Below are some of the categories that may be included in the chart.

Categories for Chart of Accounts

  • Assets
  • Liabilities
  • Equity
  • Revenue
  • Expenses


The accounts chart must be formatted similarly to the format of your balance sheet so that it is easy to interpret. This account will list all of the assets that your company owns, starting from current assets and moving on to the fixed ones. The asset account is generally given the number 1000, which moves on in a sequence for other accounts. Your current asset account would include all the cash and receivables that are owned by you. Also, if you have an inventory, that would be included in an inventory chart of accounts. 

Fixed asset accounts are adjusted similarly and, after that is done, you need to account for depreciation. Your fixed assets will always go through accumulated depreciation and it will always be shown as negative. Buildings, vehicles, and machinery all go through depreciation for which they must be accounted for.


The liabilities of your company shows your debt obligations and what you owe or may owe in the future. Just like assets, follow the same pattern for liabilities as it is followed in the balance sheet. There is a chart of accounts for a current liabilities section and a long-term liabilities section. Short-term debt accounts are included in the current liabilities section. Accrual accounts are also included in the liabilities that contain payroll taxes and accrued wages. Long-term debts such as mortgages are also recorded in the liabilities.


The equity account entails all of the investments made in the business. If you are the sole owner of the business, the chart of accounts for equity would only include your share. However, if you plan to bring in other investors, the chart would require you to account for the common and preferred stocks separately. Retained earnings and gross profit accounts are also included in this section. The accounts are generally started with the block sequence 3000, 3010, and so on.


The revenue account would be on the same pattern as the income statement. You will have to account for sales revenue, which is the main source of income for your business. Sales allowances and discounts should also be included along with sales revenue so that you have a clear picture in front of you and all the discrepancies can be accounted for easily.

Cost of goods sold is another important item in the chart of accounts for revenue. Your bookkeeping needs require you to cater to all of the sales costs, supplier discounts and other costs related to shipping.


This is the last category of the chart and often starts with 5000. The best way to input your expenses is by adhering to the internal revenue service tax form, which can be found online. This will make the work a whole lot easier when it is the end of the year and you have to file tax returns. Develop a separate chart of accounts for all expenses listed in the form in addition to any other expenses that are specific to your firm. Blank spaces should always be left for currently unaccounted expenses.


Following these guidelines will ensure that your chart of accounts is ready for interpretation and is in correlation with both your balance sheet and income statement.

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