Chart of Accounts: A Comprehensive Guide with Real-World Examples

You may be wondering: "Why create a chart of accounts?"

Even a basic chart of accounts is an excellent way to view your business's finances. The purpose of a chart of accounts is to aid in decision-making for your small business by tracking transactions and organizing the results in an easily digestible format.

In this blog, we'll go into detail about what a chart of accounts is, how to create one for your business, critical real-world examples, and other helpful information that provides you with a comprehensive picture. 

Understanding the small business chart of accounts

What is a chart of accounts?

Your chart of accounts allows you to view multiple financial transactions along with a description, identification number, and name of each. You're able to view the chart of accounts categories within a general ledger, which includes: 

• Assets
• Liabilities
• Shareholder’s equity
• Revenue
• Expenses

Main chart of accounts components

Assets
What your business owns are called assets, and you'll track two types: current and noncurrent. The assets section in your chart of accounts will begin with the account number "1000."

Current assets include assets your business will use in the next year, such as:

• Accounts receivable 
• Cash
• Inventory
• Prepaid expenses

Noncurrent assets or long-term assets are assets that will be used for longer than one year, including the following: 

• Accumulated depreciation
• Buildings
• Furniture and fixtures
• Leases 
• Plant and equipment
• Vehicles

Liabilities
Your business owes liabilities. This section begins with the account number "2000," and like your assets, you'll track both current and noncurrent liabilities.

Current liabilities, or short-term liabilities, include liabilities that your business will use next year. Current liabilities include: 

• Loans and mortgages payable
• Payroll taxes payable
• Sales taxes payable

Noncurrent liabilities or long-term liabilities are liabilities that will be used for longer than one year, including: 

• Loans payable
• Mortgages payable

Equity
Equity refers to shareholder equity in your chart of accounts and will begin with the account number "3000." Common examples of equity found in your chart of accounts include: 

• Common stock
• Preferred stock
• Retained earnings

Revenue
Revenue is the income your business makes, primarily or secondarily. There are two revenue types that begin with the account number "4000" in your chart of accounts: operating revenue and non-operating revenue.

Operating income is the income that your business primarily makes. Non-operating revenue is revenue that your company makes indirectly. This form of revenue can come from: 

• Asset write-downs
• Dividend income 
• Foreign exchange gains or losses
• Interest income
• Profits or losses from investments
• Rental income from property

Expenses
There are two expense types: operating expenses and non-operating expenses, which will begin with the account number "5000."

Operating expenses are expenses that occur to cover operational costs. You may have expenses from the following: 

• Equipment 
• Insurance
• Inventory costs 
• Marketing
• Payroll
• Step costs

Non-operating expenses are expenses unrelated to business operations. These include: 

• Amortization 
• Depreciation
• Interest charges

Importance of structure and organization 

There are two critical areas where your chart of accounts is vital for your business.

1) Structure. How your chart of accounts is structured allows you to view all of your business's financial transactions based on the general ledger. This allows you to search transactions swiftly.

2) Organization. A second benefit to the organization of a chart of accounts is that you can use this information for investment opportunities. This lets prospective investors or shareholders determine your business's financial health via the financial information provided. 

Components of a chart of accounts

The information you record in your chart of accounts provides the data necessary to create your business's financial statements. All of your accounts will appear in these statements, with the chart of accounts determining which statement they should appear in. If your chart of accounts is outdated or incorrectly structured or organized, your statements won't be correct, either.

The financial statements include the following: 

• Income Statement. Also known as a profit and loss statement, this statement focuses on your business's revenue and expenses. 
• Cash Flow Statement. This statement records the total cash from various sources, including petty cash, and cash going out of your business in support of your operations. 
• Balance Sheet. This sheet records your business's assets, liabilities, shareholder equity, and debt. 

How to create a chart of accounts

To set up your chart of accounts, you'll create three columns to help you categorize: an Account Name, Type of Account, and Description.

• Account Name. You’ll list your account names in this column. 
• Type of Account. This column, to the right of Account Name, will list the account that you’re adding. You can select from an asset, cost of goods sold, equity, expense, income, or liability.
• Description. The final column, to the Type of Account's right, describes the transaction that occurred. 

Real-world examples of standard chart of accounts

Medical practice chart of accounts (chart of accounts example 1)

Account Type	Account Code	Account Name
Assets	1010	Cash - Operating Account
Assets	1020	Cash - Savings Account
Assets	1030	Medical Supplies Inventory
Assets	2010	Medical Equipment
Assets	2020	Office Furniture
Assets	2030	Accumulated Depreciation - Equipment
Assets	2040	Accumulated Depreciation - Furniture
Liabilities	3010	Accounts Payable
Liabilities	3020	Payroll Liabilities
Liabilities	3030	Unearned Revenue
Equity	4010	Owner's Capital
Equity	4020	Retained Earnings
Revenue	5010	Patient Service Revenue
Revenue	5020	Miscellaneous Revenue
Cost of Goods Sold	6010	Medical Supplies Expense
Expenses	7010	Salaries & Wages
Expenses	7020	Rent or Mortgage Expenses
Expenses	7030	Utilities

Restaurant chart of accounts (chart of accounts example 2)

Account Type	Account Code	Account Name
Assets	1010	Beverage Supply Inventory
Assets	1020	Food Supply Inventory
Assets	1030	Prepaid Expenses
Assets	2010	Kitchen Equipment
Assets	2020	Dining Furniture
Assets	2030	Accumulated Depreciation - Kitchen Equipment
Assets	2040	Accumulated Depreciation - Dining Furniture
Liabilities	3010	Accounts Payable
Liabilities	3020	Payroll Liabilities
Liabilities	3030	Loans
Equity	4010	Owner's Capital
Equity	4020	Retained Earnings
Revenue	5010	Dining Revenue
Revenue	5020	Miscellaneous Revenue
Cost of Goods Sold	6010	Food, beverage, and employee Expense
Expenses	7010	Salaries & Wages
Expenses	7020	Insurance
Expenses	7030	Depreciation Expense

Maintaining and updating a chart of accounts

You will make adjustments to your chart of accounts as time goes on. But before you start, here are a couple of things to keep in mind. 

• First, if you want to add an account to your chart of accounts, you should do so before it becomes a problem. While you can add transactions at any point in the year, you don’t want to delay adding transactions and their accompanying information. If you wait, then you may need to adjust other entries in related categories or subcategories, causing more issues.

• Second, if you add an account, it is helpful to designate a name for it. The name most commonly used for newly added accounts is Miscellaneous Expenses. You should use this name whether you have one uncategorized transaction out of the year or multiple uncategorized transactions. 

• Third, if you add a Miscellaneous Expense to your account, provide a more detailed explanation than usual. Even though you’ve already added a description, you want to explain how and why this expense differs. As you add accounts to this category, make adjustments as needed.

• Finally, and most importantly, you shouldn’t delete any accounts until the end of the year. If you delete the accounts earlier, that can create additional disruptions. 

Partner with professionals who understand the chart of accounts

Financial data and financial reporting are an important addition to any small business and can be harvested from many areas, including the following: 

• Expense accounts
• Asset accounts
• Balance sheet accounts
• Equity accounts
• Financial accounts
• Liability accounts
• Revenue accounts
• Sub-accounts

A chart of accounts isn't required, but the valuable insights it provides can contribute to critical data-backed decision-making for your small business. However, creating and managing a chart of accounts is often too much for many busy owners and entrepreneurs to handle, which is why so many of them trust 1-800Accountant, America's leading virtual accounting firm for small businesses, for their needs.

Whether it's tax advisory, bookkeeping for the chart of accounts, robust educational content, or any of our professional accounting services, we have the solution you need at a price that fits within your budget. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.