How to Set Up a Chart of Accounts for a Small Business

A chart of accounts is the list of categories your business uses to sort every dollar that comes in or goes out. It’s the backbone of your books: every transaction is recorded against one or more of these accounts, and every report you run is built from them. A good chart makes your reports readable and your tax return quick. A messy one, with fifty overlapping categories or a giant “Miscellaneous”, makes both harder.

This guide explains the account types, a simple numbering scheme, how to keep the list short, and how to line your expense accounts up with the tax form a sole proprietor files.

The account types

Most charts of accounts group accounts into five types, sometimes six.

1. Assets: what the business owns. Checking and savings accounts, money customers owe you (accounts receivable), equipment, vehicles.
2. Liabilities: what the business owes. Credit cards, loans, sales tax collected but not yet paid, customer deposits.
3. Equity: the owner’s stake. Owner contributions, owner draws and retained earnings (profit kept in the business from earlier periods).
4. Income: what the business earns. Service revenue, product sales, interest.
5. Expenses: what it costs to run. Rent, software, advertising, insurance, supplies.

Some businesses add a sixth type, cost of goods sold, for the direct cost of products they sell, kept separate from general expenses so gross margin is easy to see. A service business usually doesn’t need it.

The first three types describe where the business stands on a given day (the balance sheet). The last two describe how it performed over a period (profit and loss).

A simple numbering scheme

Numbers keep accounts in a predictable order and make it obvious which type an account belongs to. A common pattern:

• 1000–1999 Assets
• 2000–2999 Liabilities
• 3000–3999 Equity
• 4000–4999 Income
• 5000–5999 Cost of goods sold
• 6000–7999 Expenses

Leave gaps between numbers (1010, 1020, 1030 rather than 1001, 1002, 1003) so you can add an account later without renumbering. Numbers are optional in small books, but they help when you talk to an accountant or move to new software.

Keep it small

The most common mistake is too many accounts. Each one should earn its place by answering a question you actually ask.

A freelancer or consultant can often run on fifteen to twenty-five accounts. A useful test: if an account would hold only one or two transactions a year, fold it into a broader one. If an account grows huge and you can’t say what’s in it, split it.

Use other tools for detail instead of new accounts. Tags, classes or memos can track which client or project an expense relates to without adding an account per client.

Map expenses to Schedule C

If you’re a sole proprietor or a single-member LLC that hasn’t elected corporate tax treatment, your business goes on Schedule C. Naming your expense accounts after its lines means your year-end totals drop straight onto the form.

On the 2025 Schedule C, the expense lines are 8 advertising, 9 car and truck, 10 commissions and fees, 11 contract labor, 12 depletion, 13 depreciation and section 179, 14 employee benefit programs, 15 insurance (other than health), 16a mortgage interest, 16b other interest, 17 legal and professional services, 18 office expense, 19 pension and profit-sharing plans, 20a rent or lease of vehicles, machinery and equipment, 20b rent or lease of other business property, 21 repairs and maintenance, 22 supplies, 23 taxes and licenses, 24a travel, 24b deductible meals, 25 utilities, 26 wages, 27a the energy efficient commercial buildings deduction, and 27b other expenses. Line 30 is business use of home. See the Schedule C form and its instructions.

You don’t need an account for every line. Skip the ones that will never apply to you (depletion, employee benefits if you have no employees). You can also have more than one account mapping to the same line: “Software” and “Office supplies” might both map to line 18 or 22, depending on how your preparer treats them, while still showing separately in your own reports.

One line to watch is 24b, deductible meals. In most cases only 50% of business meals is deductible, so keeping meals in their own account makes that calculation simple.

An example chart for a consultant

Here’s a compact chart a solo consultant might use:

Assets

• 1010 Business checking
• 1020 Tax savings
• 1200 Accounts receivable
• 1500 Computer equipment

Liabilities

• 2010 Business credit card

Equity

• 3010 Owner contributions
• 3020 Owner draws
• 3900 Retained earnings

Income

• 4010 Consulting fees
• 4020 Workshop and speaking fees
• 4900 Interest income

Expenses

• 6010 Advertising (line 8)
• 6020 Contract labor (line 11)
• 6030 Insurance (line 15)
• 6040 Legal and professional (line 17)
• 6050 Software and subscriptions (line 18)
• 6060 Office supplies (line 22)
• 6070 Licenses and fees (line 23)
• 6080 Travel (line 24a)
• 6090 Meals (line 24b)
• 6100 Phone and internet (line 25)
• 6900 Bank and card fees (line 27b)

That’s 21 accounts, and it covers almost everything a consultant spends money on.

Changing the chart later

Your chart will change as the business does. A few rules keep the history intact:

• Add accounts freely, using the gaps in your numbering.
• Rename with care. Renaming “Supplies” to “Office supplies” is fine; changing an account’s meaning partway through the year makes reports confusing.
• Don’t delete accounts with history. Make them inactive instead, so past reports still add up.
• Make big changes at year end, so a full year is reported one way.

Before your first year end, it’s worth showing the chart to your tax preparer. Ten minutes of their time can save you recategorizing a year of transactions.

How Kemback fits

Small Business, part of Kemback Business, seeds each company with a chart of accounts for a small US business, with every income and expense account mapped to its Schedule C line, so the totals line up with the form and the Schedule C summary for a tax year adds them up for you or your preparer. Owner draws and contributions sit in their own accounts, apart from income and expenses. If you own rental homes, Rental Houses puts each expense on its Schedule E line (rental property tracking). See pricing or create an account.

This post is general information, not tax advice. Tax rules change over time; check with a qualified tax professional for your situation.

#chart of accounts #bookkeeping basics #schedule c

This article is general information, not financial, tax or legal advice. For decisions about your situation, talk to a qualified professional.