Below, we’ll discuss why a chart of accounts is so important for your small business; how to make a chart of accounts, and some common account types.

What Is a Chart of Accounts?

A chart of accounts is an important component of bookkeeping that allows a business owner to index and keep track of all monetary transactions in which the business engages. The list is part of a business’s general ledger that breaks down and classifies financial activity into categories. A chart of accounts is arranged with a numbering system to help keep the recordkeeping process more organized. Below, we’ll delve into the different types of accounts and how to number them.

How To Make a Chart of Accounts

While creating a chart of accounts can be done using a spreadsheet, there’s also accounting software available designed to help facilitate your bookkeeping process. We’ll walk through the basic steps of making a chart of accounts.

Title Your Business Accounts

A chart of accounts usually consists of three main columns. Start by assigning names to your business accounts—descriptions such as “Equipment,” “Accounts Payable,” and “Utilities.” This will be the middle column of your chart.

Coordinate Account Numbers

Next, you’ll need to give each of your five main categories account numbers. These are commonly listed in the first column. Typically, the categories are numbered as follows (the example below represents a medium-sized business):

Asset Accounts: 101-199Liability Accounts: 201-299Equity Accounts: 301-399Revenue Accounts: 401-499Expense Accounts: 501-599

Assign Category Types

The last column in your chart of accounts should assign a category type to each of the business accounts you listed in the middle column. For example, your business account titled “Equipment” would be labeled as an asset account, and the “Utilities” account would be labeled as an expense account.

Common Account Types

Within the five general types of categories of accounts, assets, liabilities, and equity comprise the balance sheet, or statement of financial position. The other two, revenue and expenses, together amount to the income statement, or statement of financial activity. Below are examples of what types of transactions fit in each account.

Asset Accounts

Assets are resources that the business has or controls that will create future benefits, such as:

CashEquipmentInventoryCarsAccounts receivableLong- and short-term investments

Liability Accounts

Liabilities are obligations that the business owes, things such as:

Accounts payableShort- and long-term debtInsurance payableInterest payable

Equity Accounts

This is how much the business owners are owed, or what’s left of assets after a company’s liabilities are paid, such as:

Retained earningsCommon, preferred, and treasury stockOwner’s capitalCash dividends

Revenue Accounts

This is the business’s monetary incoming; for example:

CommissionsRevenue from dividends or interestSalesInvestment earnings

Expense Accounts

This is the costs of creating business revenue; for instance:

RentSalariesSuppliesDepreciation expenses