How to set up a chart of accounts

The chart of accounts is the list of categories every transaction is sorted into. A good one makes the books quick to keep and the tax return quick to prepare. This guide shows how to build one and gives a starter list.

By Hamza Fida, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 2 minute read.

Short answer

To set up a chart of accounts, list the categories your business will use under five types: assets, liabilities, equity, income and expenses. Keep it short and match expense accounts to the lines on your tax return, such as Schedule C, so year-end totals drop straight onto the forms. Add accounts only when you need them.

At a glance

Account types
Assets, liabilities, equity, income, expenses
Guiding rule
Match expense accounts to tax return lines
Size
As short as possible, typically a few dozen accounts
Numbering
Optional, often 1000s assets to 5000s-6000s expenses
Owner transactions
Equity accounts, not income or expenses
Avoid
A catch-all 'miscellaneous' account
How to set up a chart of accountsSteps: 1. Start from your tax return; 2. Add your balance sheet accounts; 3. Add equity accounts; 4. Add only the detail you will use; 5. Review after three months.THE PROCESS AT A GLANCEHow to set up a chart of accounts1Start from yourtax returnList the income andexpense lines on theform you file, such asSchedule C or Form 10652Add your balancesheet accountsEvery bank, card, loanand platform account,plus inventory andequipment if you havethem3Add equityaccountsFor money owners put inand take out4Add only thedetail you willuseA separate account fora large recurring cost,such as advertising byplatform, if you wantto track it5Review afterthree monthsMerge accounts yourarely use and splitany that hide importantcostsChecked against official sourcesTax BakersHow to set up a chart of accountsSteps: 1. Start from your tax return; 2. Add your balance sheet accounts; 3. Add equity accounts; 4. Add only the detail you will use; 5. Review after three months.THE PROCESS AT A GLANCEHow to set up a chart of accounts1Start from your tax returnList the income and expense lines on theform you file, such as Schedule C or Form10652Add your balance sheet accountsEvery bank, card, loan and platform account,plus inventory and equipment if you havethem3Add equity accountsFor money owners put in and take out4Add only the detail you will useA separate account for a large recurringcost, such as advertising by platform, ifyou want to track it5Review after three monthsMerge accounts you rarely use and split anythat hide important costsChecked against official sourcesTax Bakers
The process at a glance: 1. Start from your tax return; 2. Add your balance sheet accounts; 3. Add equity accounts; 4. Add only the detail you will use; 5. Review after three months.

What are the five account types?

TypeWhat it holdsExamples
AssetsWhat the business owns or is owedBank accounts, money owed by customers, inventory, equipment
LiabilitiesWhat the business owesCredit cards, loans, sales tax collected and not yet paid
EquityThe owners' stakeOwner contributions, owner draws or distributions, retained earnings
IncomeWhat the business earnsSales, service fees, other income
ExpensesWhat it costs to runCost of goods sold, advertising, software, rent, contractors

Loans and credit cards each need their own liability account. See how to record loans, credit cards and interest.

How do you set it up?

  1. Start from your tax return

    List the income and expense lines on the form you file, such as Schedule C or Form 1065.

  2. Add your balance sheet accounts

    Every bank, card, loan and platform account, plus inventory and equipment if you have them.

  3. Add equity accounts

    For money owners put in and take out.

  4. Add only the detail you will use

    A separate account for a large recurring cost, such as advertising by platform, if you want to track it.

  5. Review after three months

    Merge accounts you rarely use and split any that hide important costs.

What does a starter chart look like?

  • Assets: business checking, payment processor balance, accounts receivable, inventory, equipment.
  • Liabilities: business credit card, loans, sales tax payable, payroll liabilities.
  • Equity: owner contributions, owner draws, retained earnings.
  • Income: sales, shipping income, refunds and allowances.
  • Cost of goods sold: product purchases, inbound freight, duties.
  • Expenses: advertising, bank and payment fees, contract labor, insurance, interest, legal and professional, office, rent, software, travel, meals, utilities, wages, taxes and licenses.

For which costs are deductible, see deductible business expenses. For putting each cost in the right category, see how to categorize business expenses.

What mistakes should you avoid?

  • Recording owner draws as expenses, which understates profit. See how to pay yourself from an LLC.
  • Recording sales tax collected as income, when it is a liability.
  • A large "miscellaneous" account that hides costs and raises questions.
  • Too many accounts, so the same cost ends up in different places each month.

See bookkeeping basics for how the chart fits into the monthly routine.

Want your books set up properly?

We build a chart of accounts matched to your business and tax return, and keep your books on it every month.

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Questions people ask

What is a chart of accounts?

The list of categories a business sorts its transactions into, under assets, liabilities, equity, income and expenses.

How many accounts should a small business have?

As few as work, typically a few dozen, matched to the tax return lines.

Should I number my accounts?

It is optional. A common scheme uses 1000s for assets through to 5000s and 6000s for expenses.

Where do owner draws go in the chart of accounts?

In equity, not expenses.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS: About Schedule C (Form 1040)
  2. IRS Publication 583: Starting a Business and Keeping Records
  3. IRS: Instructions for Form 1065 (2025)

Rules and fees change. If you are reading this long after September 30, 2026, confirm the figures with the source before you rely on them.

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This guide is general information. It is not tax or legal advice for your situation.