Chart of Accounts Tutorial: How to Build a Solid Chart of Accounts

The chart of accounts is the backbone of your financial reporting. Before you start creating or overhauling your chart of accounts, it is wise to talk with your CPA or external accountant so you can align your structure with tax, reporting, and industry requirements.

In this tutorial, we will walk through what a chart of accounts is, how account numbers are typically structured, and the practical steps management should take to design a chart of accounts that actually supports decision-making. This is not about textbook theory — it is about giving your company the reporting it needs to run a successful business.

If you are in the process of evaluating new accounting software at the same time, you may also want to review our Accounting Software Buyer's Guide and our Best Accounting Software for Small Businesses overview.

This article is part of the Plus & Minus Tutorials series, where we walk through core accounting concepts and how to structure your system.

What Is a Chart of Accounts?

The chart of accounts (COA) is a listing of all the accounts where you record the inflows and outflows of money in your business. You can think of each account as a bucket: you can pour money into a bucket and you can pour money out of a bucket. Every time you record a transaction, you are telling your accounting system which buckets are affected.

A good chart of accounts:

  • Reflects how your business actually operates.
  • Supports the reports management needs to see regularly.
  • Is logical and consistent, so people can learn and use it easily.
  • Is flexible enough to handle growth and additional detail over time.

A poor chart of accounts, on the other hand, makes reporting confusing, encourages people to post to the wrong accounts, and often leads to heavy spreadsheet work outside the accounting system.

The Five Major Categories in a Chart of Accounts

Although account names and numbering schemes can vary from company to company, the chart of accounts is built around five major categories, listed in this order:

  1. Assets
  2. Liabilities
  3. Equity
  4. Revenue
  5. Expenses

Every account you create will live under one of these five categories:

  • Assets: What the company owns (cash, receivables, inventory, property, equipment, etc.).
  • Liabilities: What the company owes (payables, loans, accrued expenses, taxes payable, etc.).
  • Equity: Owner's capital, retained earnings, and similar balances.
  • Revenue: Income from sales of products and services, and other income streams.
  • Expenses: Costs incurred to run the business (payroll, rent, utilities, supplies, etc.).

Your accounting software will use these categories to produce your balance sheet and income statement. A well-structured chart of accounts makes those financial statements easier to understand.

How Account Numbers Are Typically Structured

In most systems, each account has both a name and a number. The numbers follow a logical pattern so that you can tell what type of account you are looking at by the first digit.

A common pattern looks like this:

  • Assets: Accounts starting with 1
  • Liabilities: Accounts starting with 2
  • Equity: Accounts starting with 3
  • Revenue: Accounts starting with 4 (and sometimes 5, 6, 7, 8 depending on the level of detail you need)
  • Expenses: Accounts starting with 5, 6, 7, 8, or 9, depending on how you group expenses

For example, you might see something like:

  • 101 — Cash
  • 102 — Accounts Receivable
  • 103 — Prepaid Insurance
  • 104 — Inventory
  • 105 — Property, Plant, and Equipment

Textbook examples often stop there, but real companies usually go further and define additional accounts and sub-accounts so management can see the level of detail needed to run the business.

Using Sub-Accounts for More Detail

Each account in your chart of accounts should be able to support subsidiary accounts, often called sub-accounts. Sub-accounts let you group related items under a main account while still seeing detail.

For example:

  • 5100 — Travel Expense
    • 5101 — Airfare
    • 5102 — Lodging
    • 5103 — Meals
    • 5104 — Ground Transportation

This approach lets you report total travel expenses at a high level while still understanding where money is actually being spent. How many levels of sub-accounts you can use depends on the stability and design of your accounting software.

In a unified system like Plus & Minus, your chart of accounts, sub-accounts, and reporting are all part of the same file and format, which makes it easier to customize the level of detail you need during implementation. If you would like to see what this looks like in practice, you can book a live Plus & Minus demo.

Step-by-Step: How to Design Your Chart of Accounts

Before you add or remove accounts, take a step back and think about what management really needs to see on a recurring basis. The goal is not to create the longest chart of accounts possible; the goal is to build a structure that gives clear, usable information.

Step 1: Talk with Your CPA or External Accountant

Your CPA can bring tax and compliance experience that goes beyond what any generic tutorial can provide. Sit down together and review your current chart of accounts, any industry-specific requirements, and the reporting you need for lenders, investors, or boards.

Step 2: Identify the Reports Management Needs

Ask management questions like:

  • What do we need to see every month to know if we are on track?
  • Do we need profitability by job, project, customer, or location?
  • How important is inventory detail for decision-making?
  • Which expense categories matter most when we review the budget?

Use the answers to drive how much detail you include in revenue and expense accounts and where you need sub-accounts.

Step 3: Design Revenue Accounts Around How You Earn Money

Revenue accounts should reflect how your business actually earns income. For example:

  • 4000 — Product Sales
  • 4100 — Service Revenue
  • 4200 — Maintenance Contracts
  • 4300 — Other Income

If you run multiple lines of business, consider separate revenue accounts or sub-accounts so you can see performance by service line.

Step 4: Design Expense Accounts Around How You Spend Money

Expense accounts should make it easy to answer questions like "Where is our money going?" and "Which costs are growing the fastest?" Group expenses logically:

  • Payroll and related costs
  • Facilities and occupancy
  • Selling and marketing expenses
  • General and administrative expenses

Use sub-accounts when you need detail (for example, under Payroll or Travel). Avoid creating so many accounts that you have several with very small balances each month.

Step 5: Keep Assets, Liabilities, and Equity Clear and Organized

Assets, liabilities, and equity form the structure of your balance sheet. Make sure:

  • Cash accounts are clearly labeled (by bank or purpose).
  • Receivables and payables are separated by type if needed.
  • Loans and long-term obligations have their own accounts.
  • Owner equity and retained earnings are clearly identified.

Step 6: Map the Chart of Accounts into Your Accounting Software

Once you are happy with the design on paper, map the accounts into your accounting system. In Plus & Minus, we typically do this as part of a structured implementation process where we also configure jobs, inventory, and reporting to match your chart of accounts.

If you are considering a new system, you can learn more about how Plus & Minus handles implementation in our Best Accounting Software for Small Businesses guide or by scheduling a demo.

When to Revisit Your Chart of Accounts

Your chart of accounts is not something you should change every month, but it is also not carved in stone forever. It often makes sense to revisit it when:

  • You add or change major lines of business.
  • You begin tracking new metrics that your current accounts cannot support.
  • You are preparing to migrate to a new accounting system.
  • Your CPA flags issues with how certain items are being recorded.

When you make changes, document them and communicate with your finance team so everyone understands how to use the new accounts consistently.

Frequently Asked Questions About the Chart of Accounts

Do all companies use the same chart of accounts?

No. While the five major categories (assets, liabilities, equity, revenue, expenses) are common, each company customizes its chart of accounts to match its operations and reporting needs. Industry, size, and ownership structure all influence the design.

Should I copy a chart of accounts from a textbook or template?

Textbook charts of accounts are useful for learning, but they are usually too generic for real-world use. It is better to start with your reporting needs, consult with your CPA, and then adapt sample charts or templates to fit your business.

How many accounts should I have?

You should have enough accounts to give meaningful insight, but not so many that the list becomes unmanageable. If you rarely post to an account or nobody can explain why it exists, that is a sign you may have too much detail. Sub-accounts can help you strike the right balance.

How does the chart of accounts work in Plus & Minus?

In Plus & Minus, the chart of accounts is part of a single, unified accounting system that also includes payroll, inventory, job costing, and reporting. During implementation, we help you design or refine your chart of accounts so it supports your operational workflows and reporting requirements. If you would like to see how this works, you can book a Plus & Minus demo.

Need Help Designing or Implementing Your Chart of Accounts?

Creating a chart of accounts is more than a setup step; it is a foundational design decision for your accounting system. The right structure makes financial reporting clearer and management decisions easier.

If you are planning to improve your chart of accounts and are also considering new accounting software, we would be happy to walk through your situation and show you how a unified system like Plus & Minus can support your chart of accounts, jobs, inventory, and reporting.

Book a free Plus & Minus demo to talk through your chart of accounts and see how it could work inside a single, structured accounting system.

Looking for more guides like this? Visit the Plus & Minus Tutorials hub to explore more accounting and system-setup tutorials.