Bookkeeping basics
Chart of Accounts Explained: The Financial Filing Cabinet for Your Business
A plain-English guide to what a chart of accounts is, what the five account types mean, and sample charts of accounts for a service business and a product-based business.
Written by Matt Reese, CPA · 6 min read · Published April 2026·Share on LinkedIn
Key Takeaways
- A chart of accounts is the master list of every 'bucket' your business money gets sorted into.
- There are five account types: Assets, Liabilities, Equity, Revenue, and Expenses.
- More accounts isn't better — most small service businesses need 25–40 accounts total.
- QuickBooks and Xero come with pre-built charts of accounts you can customize. You rarely build one from scratch.
Think of it as a filing cabinet
Every dollar that moves through your business — money coming in, money going out, equipment you bought, a loan you took — gets filed somewhere. The chart of accounts is the list of every folder in that filing cabinet.
When your bookkeeper records a Stripe payment, it goes into “Service Revenue.” When you pay your landlord, it goes into “Rent.” When you buy a laptop, it might go into “Equipment” or get expensed under “Office Supplies & Software” depending on the cost. The chart of accounts defines all those folders in advance.
Without it, you have a pile of transactions. With it, you have a P&L, a balance sheet, and the ability to answer “how much did I spend on marketing last quarter?” in about 30 seconds.
The five account types
Every account belongs to one of five types. Understanding these makes the whole system make sense.
1. Assets — What you own
Anything the business owns that has value. Your checking account. Equipment. A vehicle. Money clients owe you (accounts receivable). If you sold everything tomorrow, assets are what you’d sell.
Analogy: the stuff in your house — the furniture, car, and savings account. Assets are what’s on your side of the ledger.
2. Liabilities — What you owe
Anything the business owes to someone else. A business credit card balance. A loan. Sales tax you’ve collected but haven’t yet sent to the state. Unpaid invoices from vendors.
Analogy: your mortgage, car payment, and credit card balance. Money that belongs to someone else even though you have use of the underlying thing.
3. Equity — What’s yours
Assets minus liabilities. What would be left for the owner if you paid off every debt and sold everything. For a small business, this includes the money you’ve put in, profits that stayed in the business, and money you’ve taken out.
Owner’s draws (money you take out as a sole prop or LLC) and S-corp distributions reduce equity. Retained earnings increase it.
4. Revenue — Money coming in
Every dollar the business earns from its operations. Service fees. Product sales. Interest income. Rental income. Revenue accounts live on your P&L.
5. Expenses — Money going out
The cost of running the business. Rent, wages, insurance, marketing, software, professional fees. Expense accounts live on your P&L. The more accurately you categorize them, the more useful your P&L becomes for actual decision-making.
Assets and liabilities are a snapshot in time — the balance sheet. Revenue and expenses happen over time — the P&L.
Sample chart of accounts: solo service business
A personal trainer, consultant, therapist, or freelancer. No inventory. No employees (or just one). Simple structure.
| Account # | Account Name | Type | What it tracks |
|---|---|---|---|
| 1010 | Business Checking | Asset | Your main operating bank account |
| 1020 | Tax Reserve Savings | Asset | The separate savings account where you hold estimated tax payments |
| 1100 | Accounts Receivable | Asset | Invoices you've sent but haven't been paid yet |
| 1500 | Equipment | Asset | Computers, cameras, tools, furniture — items with multi-year useful life |
| 1510 | Accumulated Depreciation | Asset (contra) | Offset to Equipment — reduces book value as equipment ages |
| 2010 | Business Credit Card | Liability | Balance owed on the business card |
| 2200 | Sales Tax Payable | Liability | Sales tax collected from customers, owed to the state |
| 3000 | Owner's Equity | Equity | Your investment in the business |
| 3100 | Owner's Draw | Equity | Money you've taken out (sole prop / LLC only) |
| 3200 | Retained Earnings | Equity | Profits that stayed in the business |
| 4000 | Service Revenue | Revenue | All fees earned from client work |
| 4100 | Other Income | Revenue | Miscellaneous income that doesn't fit service revenue |
| 6010 | Advertising & Marketing | Expense | Ads, website, business cards, Yelp |
| 6020 | Auto / Mileage | Expense | Business driving — mileage or actual costs |
| 6030 | Bank & Merchant Fees | Expense | Stripe, Square, monthly account fees |
| 6040 | Dues & Subscriptions | Expense | Industry memberships, associations, publications |
| 6050 | Education & Training | Expense | Courses, certifications, books, conferences |
| 6060 | Equipment & Software | Expense | Lower-cost items expensed rather than capitalized |
| 6070 | Insurance | Expense | Liability, professional liability, business insurance |
| 6080 | Legal & Professional | Expense | CPA, attorney, bookkeeper |
| 6090 | Meals (Business) | Expense | Client meals — 50% deductible |
| 6100 | Office Supplies | Expense | Paper, ink, small supplies |
| 6110 | Rent & Lease | Expense | Office, studio, storage |
| 6120 | Telephone & Internet | Expense | Phone and internet, business-use portion |
| 6130 | Travel | Expense | Flights, hotels, rental cars for business |
Sample chart of accounts: product-based or retail business
A salon, boutique, or any business that buys and sells physical goods. Adds inventory, COGS, and payroll to the service template.
| Account # | Account Name | Type | What it tracks |
|---|---|---|---|
| 1010 | Business Checking | Asset | Operating bank account |
| 1020 | Tax Reserve Savings | Asset | Estimated tax holding account |
| 1100 | Accounts Receivable | Asset | Unpaid invoices |
| 1200 | Inventory | Asset | Products you've bought and not yet sold |
| 1500 | Equipment | Asset | Fixtures, machinery, POS hardware |
| 2010 | Business Credit Card | Liability | Card balance |
| 2200 | Sales Tax Payable | Liability | Sales tax collected, awaiting remittance |
| 2300 | Payroll Taxes Payable | Liability | Employee withholding and employer match, awaiting deposit |
| 4000 | Service Revenue | Revenue | Labor fees (cuts, color, treatments) |
| 4100 | Product Sales | Revenue | Retail product sold to customers |
| 5000 | Cost of Goods Sold | COGS | Direct cost of products sold |
| 5100 | Direct Supplies / Materials | COGS | Color, chemicals, supplies used in services |
| 6010 | Advertising & Marketing | Expense | Ads, promotions, email marketing |
| 6020 | Bank & Merchant Fees | Expense | POS fees, credit card processing |
| 6070 | Insurance | Expense | Liability, workers comp, property |
| 6080 | Legal & Professional | Expense | CPA, attorney |
| 6100 | Rent & Lease | Expense | Salon lease |
| 6110 | Repairs & Maintenance | Expense | Equipment repair, building maintenance |
| 6120 | Utilities | Expense | Electric, water, gas |
| 6150 | Wages & Salaries | Expense | Employee pay (W-2) |
| 6160 | Payroll Tax Expense | Expense | Employer FICA and unemployment taxes |
| 6170 | Employee Benefits | Expense | Health insurance, retirement match |
How this looks in QuickBooks Online
In QuickBooks Online, your chart of accounts lives under Settings → Chart of Accounts. When you set up a new company, QuickBooks auto-populates a default chart based on your industry. You can:
- Edit account names to match your terminology
- Add new accounts using the green “New” button
- Mark rarely-used accounts as inactive (they don’t delete, just hide)
- Assign account numbers if you want the numbered system
Don't delete, deactivate
How this looks in Xero
In Xero, the chart of accounts is under Accounting → Chart of Accounts. Same concept — Xero pre-builds a list based on your country and business type. You can:
- Add accounts using “Add Account”
- Archive accounts you don’t need (they become inactive, transactions remain)
- Edit names, numbers, and tax codes
- Import a custom chart via CSV if you’re migrating from another system
Common mistakes to avoid
- Too many accounts.Creating a separate account for every software subscription, every type of insurance, every vendor. It makes reports impossible to read. Keep it simple — if you have fewer than 50 accounts total, you’re probably fine. Most solo service businesses need 25–35.
- Everything in “Miscellaneous Expense.”If 30% of your P&L is “misc,” your P&L is useless. Spending five extra minutes categorizing correctly is worth it.
- Revenue miscategorized as equity.Many new owners book customer payments directly as “Owner’s Equity” or as a loan repayment. Revenue is revenue — it belongs on the P&L, not the balance sheet.
- Owner draws coded as expenses.When you pay yourself from a sole prop or LLC, that’s an equity draw, not an expense. Coding it as an expense inflates your costs and deflates your profit on paper — which might look good until your bank asks for a P&L to approve a loan.
You might also read
How to Read a Profit & Loss Statement (With Real Examples)
A plain-English walkthrough of what a P&L actually tells you, with sample statements for a personal trainer, therapist, salon, and franchise restaurant.
BookkeepingBusiness Expense Categories: What to Track and How to Enter It in QuickBooks or Xero
The most common expense categories, QuickBooks and Xero names, and the special rules for auto, meals, and home office.
BookkeepingDoes Every Business Transaction Need to Be Accounted For?
Yes — and not every transaction is an expense. How to categorize correctly so your books actually tell you something useful.
Frequently asked
Questions owners actually ask
- Does my accountant set this up, or do I?
- In practice, both. QuickBooks and Xero include a default chart of accounts based on your industry when you set up the software. A CPA or bookkeeper will then clean it up — removing accounts you don't need, renaming things to match how you actually run the business, and adding accounts specific to your situation.
- What's the difference between an account number and an account name?
- Account numbers are optional but conventional. Most systems organize accounts by type using number ranges: 1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for revenue, 5000s for cost of goods, 6000s for expenses. The name is what you see on reports. Both can be customized.
- I see 'Uncategorized Expense' on my P&L. What does that mean?
- It means a transaction came in that didn't match any category rule, so QuickBooks or Xero dumped it in a catch-all. It's a bookkeeping flag — find those transactions and assign them to the right account. An 'Uncategorized' line on a P&L delivered to a CPA or banker is a red flag.
- Should I have a separate account for every vendor?
- No. Accounts represent categories of spending, not individual vendors. You have one 'Advertising' account — not separate accounts for Facebook, Google, and Yelp. The vendor detail lives inside the transaction record, not in separate accounts.
Take the next step
Turn tax questions into a plan. Talk with Matt or see how we work with operating business owners.
Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.