How to Build a Chart of Accounts That Actually Makes Sense

Kim Bernstein
Apr 11
2 min read

Your chart of accounts (COA) is like the filing cabinet of your financial system—and when it’s messy or overly complicated, everything else becomes harder. But when it’s set up right? It makes bookkeeping easier, reports more accurate, and tax time less stressful.

Here’s how to build a chart of accounts that’s clear, useful, and tailored to your business.

What Is a Chart of Accounts?

The chart of accounts is the list of categories your business uses to track income, expenses, assets, liabilities, and equity.

Each transaction in your books gets assigned to one of these accounts. Think of it as the backbone of your bookkeeping system.

Main Account Categories

Every chart of accounts is built on five core account types:

Assets – What your business owns (cash, accounts receivable, inventory)
Liabilities – What your business owes (credit cards, loans, payroll taxes)
Equity – The value of your business (owner investments, retained earnings)
Income – Money your business earns (sales, services, rental income)
Expenses – What your business spends (rent, supplies, utilities, marketing)

Tips for Building a Clean & Functional Chart of Accounts

✅ Keep It Simple – Don’t overcomplicate it. Use categories that clearly reflect your business activities.

✅ Group Similar Items – Group expenses by type (e.g., Office Supplies, Software, Advertising).

✅ Use Subaccounts Strategically – Only if you really need extra detail (like breaking down advertising into Facebook, Google, etc.).

✅ Name Clearly – Avoid jargon or overly vague terms. “Meals & Entertainment” is better than “Other Expenses.”

✅ Use Account Numbers (Optional) – Helps with sorting, especially if you run reports often or have lots of accounts.

Common Income & Expense Accounts for Small Businesses

Here’s a starting point for most service-based businesses:

Income Accounts

Service Income
Product Sales
Rental or Commission Income

Expense Accounts

Rent or Lease
Utilities
Office Supplies
Subcontractors / Independent Contractors
Software Subscriptions
Marketing & Advertising
Meals & Entertainment (50% deductible)
Travel
Insurance
Bank & Merchant Fees
Professional Services (legal, accounting, etc.)

📌 Pro Tip: Match your COA with your tax return categories (like Schedule C or Form 1120-S) to make year-end filing easier.

When to Reorganize Your Chart of Accounts

You’ve added new services or revenue streams
You’re struggling to interpret reports
Your COA has grown out of control with unnecessary accounts
You’ve switched accounting software and want a clean start

🎯 A good chart of accounts should help you understand where your money is going—not just make your books look organized.

Final Thoughts

If your current chart of accounts feels like a maze of confusion, you’re not alone—and it’s never too late to clean it up.

Want help customizing your chart of accounts to fit your business goals and tax needs? KB2 Bookkeeping & Tax can help you build a system that works for you—not against you. Let’s simplify it together! 🗂️📈