What is a Chart of Accounts and How to Organize One?

The chart of accounts lists all the accounts used by a company to record financial transactions.

Some of the accounts will end up on your balance sheet, and some will be on your profit & loss report. The accounts are categorized into different groups based on the type of transaction, such as assets, liabilities, equity, revenue, and expenses.

Having a well-organized chart of accounts helps ensure accurate financial reporting and gives you insights into the financial health of your business.

Here’s what you need to know to create a useful chart of accounts:

Create account categories: Categorize accounts into groups to make it easier to track and report financial information. Common categories include assets, liabilities, equity, revenue, and expenses. Software like QuickBooks Online will do this for you.

Wondering what categories to use? Check out the IRS tax return forms for your business entity type (Schedule C if you’re a sole prop, Form 1120S if you’re an S-Corporation). These provide a great starting point. Then think about how you want to see reports and information about your business.

Review and adjust: Regularly review your chart of accounts to ensure that it’s still relevant and accurate. Make adjustments as necessary to reflect changes in your business.

You can be as detailed as you want — you can have Utilities: Phone expense and Utilities: Internet expense. But remember, your accounting software can also provide you with reports showing how much you’ve paid each vendor. So you could put all your phone and internet expense into one “Utilities” account and then look at a report to see how much you paid to Comcast and T-Mobile over the year. Using just one Utilities account makes it simple to categorize your expenses every month.

By organizing your chart of accounts in a way that works well for you and your business, you can ensure accurate financial reporting and gain valuable insights into your business’s financial health.

If you’d like some help setting up your chart of accounts schedule a free consultation.