What it means
When a business pays rent, buys inventory or invoices a customer, the bookkeeper needs somewhere to record it. The chart of accounts provides that somewhere.
A typical numbering scheme assigns a range to each category: 1000 to 1999 for assets, 2000 to 2999 for liabilities, 3000 to 3999 for equity, 4000 to 4999 for revenue, and 5000 upwards for cost of sales and expenses. Within each range, accounts are ordered logically, so 1010 might be the main bank account, 1200 accounts receivable, 1400 inventory and 1700 equipment.
The chart's structure shapes the reports. If there is a single "Marketing" expense account, the income statement can only ever show one marketing line.
If there are separate accounts for digital advertising, events, agency fees and print, the same statement can show where the money went and the business can track return on each. The reverse risk is a chart with hundreds of accounts that nobody uses consistently, where the same cost lands in three places depending on who coded it.
Good charts are as detailed as the decisions the business needs to make and no more. Most accounting systems also support dimensions or tracking categories, such as department, location, project or product line, which let a single expense account be analysed several ways without multiplying the number of accounts.
A chart with 150 well-chosen accounts plus dimensions usually beats one with 800 accounts. The chart of accounts should be owned by someone, documented with a short description of what belongs in each account, and changed deliberately.
Adding accounts is easy; merging or renaming them later breaks historical comparisons. Companies that grow by acquisition often spend months mapping several inconsistent charts onto one so that group reporting works.
In practice
Real-world examples.
Example
A restaurant group sets up separate revenue accounts for food, alcohol and soft drinks and separate cost of sales accounts for each, so that the margin on every category is visible in the standard monthly report.
Example
A start-up that expenses everything to "General expenses" in its first year rebuilds its chart before raising funding because investors want to see spending by function.
Example
A charity structures its chart so that restricted and unrestricted funds are tracked in separate accounts, as its regulator requires.
Think of it
“A chart of accounts is like a filing cabinet with labeled folders. Each folder has a specific purpose, making it easy to organize and find financial information.
Formula
Calculation
There is no formula, but a well-structured chart makes the financial statements fall out of the numbering.
Worked example. A small consultancy's chart of accounts (abbreviated):
- 1010 Bank current account; 1020 Bank savings account; 1200 Accounts receivable; 1300 Prepayments; 1700 Computer equipment; 1750 Accumulated depreciation
- 2100 Accounts payable; 2200 Accrued expenses; 2300 Sales tax payable; 2400 Payroll liabilities; 2700 Bank loan
- 3000 Share capital; 3100 Retained earnings
- 4000 Consulting fees; 4100 Training revenue; 4200 Reimbursed expenses
- 5000 Subcontractor costs; 5100 Direct travel
- 6000 Salaries; 6100 Rent; 6200 Software subscriptions; 6300 Marketing; 6400 Professional fees; 6500 Depreciation
With this structure the income statement shows revenue by type (4000 series), cost of sales (5000 series) and overheads (6000 series), and gross margin is simply the 4000 series minus the 5000 series. A month in which the consultancy invoiced $60,000 of fees and $8,000 of training, paid $15,000 to subcontractors and $2,000 of direct travel gives a gross profit of $68,000 minus $17,000 = $51,000, or 75%, straight from the account totals.Case study
Seen in the real world.
A construction company with 40 staff had grown its chart of accounts to 640 accounts over fifteen years. There were eleven different "Site expenses" accounts, three accounts for fuel, and a "Suspense" account with a six-figure balance that no one could explain. Monthly reports ran to 30 pages and told the owner nothing about which projects were making money.
The new financial controller redesigned the chart down to 140 accounts, moved project tracking to a project dimension in the accounting system, and wrote a one-page coding guide for every account. The migration took a quarter and involved mapping every historical transaction to the new structure so that comparisons still worked.
The first monthly report under the new chart was four pages, showed gross margin by project, and revealed that two long-running maintenance contracts had been losing money for years. The company renegotiated both.
Watch out
Common mistakes.
- Creating a new account for every new supplier, customer or one-off item. Accounts should describe types of transaction, not counterparties.
- Leaving gaps in the numbering scheme too small to add accounts later, or none at all.
- Letting anyone add accounts. Without an owner, the chart fragments and reports lose meaning.
Questions
People also ask.
How many accounts should a chart have?
Enough to produce the reports the business needs for decisions. Most small businesses need 60 to 150; larger companies use dimensions rather than thousands of accounts.
Can I change the chart of accounts later?
Yes, but merging or renaming accounts affects historical comparisons, so plan changes at a year end and map old accounts to new ones.
Is there a standard chart of accounts?
Some countries and industries publish standard charts, and accounting software ships with templates, but most businesses tailor one to their needs.
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