A chart of accounts is the foundation of your company’s accounting processes. So, it’s important to understand how a chart of accounts works and set yours up correctly.
In this guide, we’ll break down each aspect of the chart of accounts and show you how to leverage the information it provides to keep your business finances on track.
Key Takeaways
- A chart of accounts (COA) is an index of account names that keeps your business’s financial activity organized and easy to interpret.
- There are five main account types in a COA: Assets, Liabilities, Equity, Income, and Expenses.
- A COA can (and should) be customized to suit your business type, needs, and goals.
You can add accounts to your COA at any time, but you should only delete accounts from your COA at the end of the fiscal year.
What is a Chart of Accounts?
A chart of accounts (COA) is an index of account names that keeps your business’s financial operations organized and easy to interpret. These account names categorize your business’s financial transactions and provide a well-organized breakdown of what has been earned and spent.
A COA typically includes five main account types—Assets, Liabilities, Equity, Income, and Expenses—with each of these accounts having several subcategories that reflect your business’s financial activity
Each time you make a business transaction, your COA shows you (or your bookkeeping team) how to categorize and record that transaction in your general ledger. In turn, this makes accounting more efficient, it’s easier to see how your business earns and spends money, and your business complies with the CRA’s recordkeeping requirements.
Why is a Chart of Accounts Important?
A chart of accounts is important for several reasons:
- Organized Financial Records: A COA helps you categorize all financial transactions systematically, ensuring clarity and accuracy in financial data.
- Enhanced Reporting: With your financial data organized, you can access accurate and detailed financial insights that empower better decision-making and strategic planning.
- Tax Compliance: By maintaining accurate and organized records, a COA helps ensure compliance with tax regulations and simplifies the tax filing process.
- Financial Management: It aids in monitoring financial performance, tracking expenses, and managing budgets effectively.
- Empowered Decision-Making: A well-structured COA gives business owners a clear view of their financial health, allowing them to make informed decisions. By understanding exactly where money is coming from and going to, owners can identify areas for cost savings, investments, and growth opportunities.
- Internal Controls: A COA establishes a framework for internal controls, reducing the risk of errors and fraud in financial reporting.
- Investor Confidence. Creating a COA provides a snapshot of your company's financial health—something potential lenders and investors will need to see before investing in your business, providing funding, or approving a loan.
How Do You Organize a Chart of Accounts?
Asset, liability and equity accounts are listed first in a COA. These accounts are used to generate the balance sheet, which shows your business’s financial health at a specific point in time.
Revenue and expense accounts are listed second. These accounts are used to generate the income statement, which shows your business’s profitability over time. Here’s an example of how a chart of accounts is typically organized, including account type and examples of the types of transactions or subcategories each account may include.
Account Type: Assets
Any resource your company owns that provides value. Assets may include the following.
- 1020 - Inventory
- 1000 - Cash
- 1010 - Accounts Receivable
Account Type: Liabilities
A liabilities account records the obligations or debts that a business owes to outside parties, which must be settled in the future. Liabilities may include the following.
- 2030 - Taxes Payable
- 2000 - Accounts Payable
- 2010 - Credit Card Payable
- 2020 - Business Loans
Account Type: Equity
An equity account represents the owner's interest or claim on the business assets after deducting all liabilities. Equity accounts may include the following.
- 3000 - Owner's Equity
- 3010 - Retained Earnings
- 3020 - Preferred Stock
- 3040 - Retained Earnings
Account Type: Revenue
This account represents the money your company brings in from selling its goods or services. Revenue accounts may include the following.
- 4000 - Sales Revenue
- 4010 - Service Revenue
Account Type: Expenses
All the types of money and resources a business spends in an effort to generate revenue. To calculate net income, subtract expenses from revenue. Expense accounts may include the following.
- 5070 - Utilities Bills
- 5000 - Cost of Goods Sold
- 5010 - Rent Expense
- 5020 - Utilities Expense
- 5030 - Payroll
- 5040 - Rent
- 5050 - Travel Expenses
- 5060 - Depreciation
Example Chart of Accounts: An Overview
Here’s an example chart of accounts for Maple Tech Solutions, a small business in the technology sector. We’ll use this example to contextualize the information as we explain each element of the chart of accounts below.
| Account Number | Account Type | Subcategory/ Detail Type / Account Name | Balance |
| 1000 | Assets | Cash | $10,000 |
| 1010 | Assets | Accounts Receivable | $7,500 |
| 1020 | Assets | Inventory | $12,000 |
| 1030 | Assets | Prepaid Expenses | $2,000 |
| 1040 | Assets | Fixed Assets | $50,000 |
| 1041 | Assets | Office Equipment | $15,00 |
| 1042 | Assets | Machinery | $25,000 |
| 1043 | Assets | Vehicles | $10,000 |
| 2000 | Liabilities | Accounts Payable | -$4,500 |
| 2010 | Liabilities | Credit Card Payable | -$1,200 |
| 2020 | Liabilities | GST/HST Payable | -$3,000 |
| 2030 | Liabilities | Long-Term Debt | -$20,000 |
| 2031 | Liabilities | Mortgage Payable | -$15,000 |
| 2032 | Liabilities | Bonds Payable | -$5,000 |
| 3000 | Equity | Owner's Equity | $40,000 |
| 3010 | Equity | Retained Earnings | $8,000 |
| 4000 | Revenue | Sales Revenue | $50,000 |
| 4010 | Revenue | Service Revenue | $20,000 |
| 4020 | Revenue | Interest Income | $500 |
| 5000 | Expenses | Cost of Goods Sold | -$30,000 |
| 5010 | Expenses | Rent Expense | -$6,000 |
| 5020 | Expenses | Utilities Expense | -$2,500 |
| 5030 | Expenses | Salaries Expense | -$15,000 |
| 5040 | Expenses | Office Supplies | -$1,200 |
| 5050 | Expenses | Travel Expense | -$800 |
| 5060 | Expenses | Meals & Entertainment | -$1,000 |
| 5070 | Expenses | Depreciation Expense | -$1,500 |
| 5080 | Expenses | Insurance Expense | -$2,000 |
| 5090 | Expenses | Bank Charges | -$300 |
| 5100 | Expenses | Interest Expense | -$1,200 |
| 5110 | Expenses | Bad Debt Expense | -$600 |
| 5120 | Expenses | Reconciliation Discrepancies | -$150 |
Account Number
An account number is a unique identifier assigned to each account in the chart of accounts (COA). This numbering system organizes accounts systematically, making it easier to locate and reference specific accounts.
Typically, account numbers are grouped by account type (e.g., assets, liabilities, equity, revenue, expenses).
For instance, asset accounts might start with "1xxx," liability accounts with "2xxx," and so on. This structure ensures consistency and aids in efficient financial reporting and analysis, streamlining the accounting process for businesses.
Account Type
The account type determines which financial report your data is added to—the balance sheet or the income statement.
It’s crucial to choose the right account type because it results in accurate reports that will help you analyze the financial health of your business.
As you learned in the section above, a chart of accounts will typically contain the following five main account types:
Balance sheet accounts
- Assets. Resources owned by the business, such as cash, inventory, and equipment.
- Liabilities. Obligations owed by the business, like loans and accounts payable.
- Equity. Owner's interest in the business, including retained earnings.
Income statement accounts
- Revenue. Income generated from business activities, such as sales and service revenue.
- Expenses. Costs incurred in running the business, like rent, utilities, and salaries.
Subcategory / Account Name / Detail Type / Etc
It’s common for a business to customize the chart of accounts by adding subcategories that best reflect the business’s financial activities.
For example, you can break down the transactions within your revenue and expense accounts depending on what you sell.
QuickBooks Online uses the ‘Detail Type’ column to add subcategories to your chart of accounts. Your accounting software may use a different naming convention for this function, but the functionality will be the same.
Using subcategories allows for more granular tracking and reporting, enhancing the accuracy and utility of your business’s financial data, financial statements, and financial reports.
Chart of Accounts: List of Common Categories
Most accounting platforms will give you a template chart of accounts that includes the five main account types discussed above, along with additional subcategories that suit your business type, size, and niche.
Here’s an explanation of some of the most commonly used categories businesses use in their chart of accounts.
Remember: you are free to create whatever categories you like. The goal is to end up with a chart of accounts that gives you the financial data and reporting capabilities you need while remaining easy and efficient to manage.
| Account Type | Subcategory | What It's For |
| Assets | Accounts Receivable (A/R) | List of transactions related to customers who owe you money. |
| Assets | Undeposited Funds | Holds cash or cheques ready to be deposited at the bank. |
| Assets | Inventory Asset | Tracks the current value of your inventory. |
| Liabilities | Accounts Payable (A/P) | A record of the outstanding bills that your business owes. |
| Liabilities | GST/HST Payable | Tracks all sales tax collected and paid. You can also choose to break taxes collected and paid out by province. |
| Liabilities | Loan Payable | Amounts owed on loans taken out by the business. |
| Equity | Opening Balance Equity | Ensures correct balance sheet before entering all assets and liabilities. |
| Equity | Retained Earnings | Tracks profits from earlier periods not yet distributed to owners. |
| Revenue | Uncategorized Income | Money earned that needs to be categorized. |
| Revenue | Sales Revenue | Income from selling products or services. |
| Revenue | Service Revenue | Income from services provided. |
| Revenue | Interest Income | Revenue from interest earned on investments. |
| Revenue | Sales Discounts | Reductions in sales prices given to customers. |
| Revenue | Sales Returns and Allowances | Records of products returned by customers or allowances given. |
| Expenses | Uncategorized Expense | Money spent that needs to be categorized. |
| Expenses | Bank Charges | Fees charged by the bank for account services. |
| Expenses | Interest Expense | Cost incurred from borrowing funds. |
| Expenses | Payroll Expense | Wages and related costs for employees. |
| Expenses | Rent Expense | Cost of leasing buildings or space for business operations. |
| Expenses | Utilities Expense | Costs for utilities like electricity, water, and gas. |
| Expenses | Office Supplies | Expenses for office supplies used in business operations. |
| Expenses | Travel Expense | Costs incurred for business travel. |
| Expenses | Meals & Entertainment | Costs for meals and entertainment, often subject to specific tax rules. |
| Expenses | Depreciation Expense | Allocation of the cost of fixed assets over their useful lives. |
| Expenses | Insurance Expense | Costs for business insurance policies. |
| Expenses | Bad Debt Expense | Amounts written off as uncollectible from customers. |
| Expenses | Reconciliation Discrepancies | Tracks reconciliation adjustments for any discrepancies found. |
How to Create a Chart of Accounts for Your Business
Creating a chart of accounts is a fundamental step in setting up your business's accounting system. Follow these steps to ensure your COA is comprehensive and tailored to your business needs.
1. Define Your Objectives
The complexity and structure of your chart of accounts should be customized to suit your needs and goals.
If you’re in a growth-oriented phase, your team might benefit from a detailed COA that categorizes accounts by department to track performance and manage budgets effectively.
But if you’re running a small business or sole proprietorship, you’d likely benefit from a less complex COA. You’ll get less granularity from your financial data, but your COA will be much easier to manage.
2. Create Your Main Account Types
Typically, these include:
- Assets: Resources owned by the business.
- Liabilities: Obligations owed by the business.
- Equity: Owner's interest in the business.
- Revenue: Income generated from business operations.
- Expenses: Costs incurred in running the business.
3. Create Subcategories
Now, it's time to determine which subcategories you’ll need to track and assign them to their respective account type. For example:
- Assets
- Cash
- Accounts receivable
- Inventory
- Liabilities
- Accounts payable
- Income tax payable
- Expenses
- Cost of Goods Sold
- Office Supplies
- Wages
4. Number Your Accounts
Assign a unique number to each account to facilitate easy identification and tracking. Here’s the most commonly used numbering system:
- 1xxx: Assets
- 2xxx: Liabilities
- 3xxx: Equity
- 4xxx: Revenue
- 5xxx: Expenses
Chart of Accounts Best Practices
Maintaining an effective chart of accounts is essential for accurate financial management and compliance. Here are some best practices to ensure your COA is both useful and efficient.
Capture Expenses that Matter for Tax
Properly capturing tax-related expenses is crucial for compliance. It can also make your (and your accounting team’s) life easier when it’s time to file your taxes. For example:
- Meals and Entertainment Expenses: This expense is typically subject to a 50% deduction, but there are exceptions to this rule. Capture any exceptions in a separate account within your COA to flag them to your accountant.
- CRA Penalties: These are non-deductible, and they should be recorded in a distinct account to maintain clear financial records.
Segregate One-Off Items
Segregating non-operating or infrequent items helps clarify regular economic activities in your business. Placing these items in a section called “Other” ensures they are easily identifiable.
This category might include things like:
- Interest earned on cash reserves
- One-time grants
- Government funding
- …and more.
When in doubt, ask your bookkeeping team or CPA for clarification before categorizing the transaction.
Leverage Accounting Software to Keep Things Simple
Minimizing the number of accounts in your COA can make bookkeeping a lot easier. So instead of creating multiple accounts for every little thing, see if you can utilize accounting software features like:
- Class reporting to separate data for different programs.
- Location tracking to distinguish revenue by location within a single revenue account.
Strike a Balance Between Complexity and Simplicity
Finding the right balance between detail and simplicity in your COA is crucial. Too many accounts can complicate the bookkeeping process and increase the risk of errors. Conversely, too few accounts can obscure important financial insights. Aim for a structure that is detailed enough to be informative but not overwhelming.
Add Accounts As Needed…
Regular reviews and adjustments ensure that your COA stays relevant as your business evolves. Adding new accounts to track emerging transaction types can help keep your financial data accurate and useful.
…But ONLY Delete Accounts at the End of the Fiscal Year
Deleting, renaming, or merging obsolete accounts should be reserved for the end of the fiscal year. This approach helps avoid complications during tax filing and ensures that no relevant financial information is lost or obscured throughout the year.
Chart of Accounts Regulatory Considerations for Small Businesses
When designing and maintaining a Chart of Accounts (COA), several regulatory considerations must be kept in mind. These regulations ensure that financial reporting is transparent, consistent, and compliant with national standards. Here’s a detailed overview:
Accounting Standards in Canada
Accounting Standards for Private Enterprises (ASPE): This framework is tailored for privately held companies. It offers simpler and less costly reporting options compared to IFRS, focusing on the needs of private enterprise stakeholders.
International Financial Reporting Standards (IFRS): Publicly accountable enterprises, including publicly traded companies and financial institutions, must use IFRS. Some private companies might voluntarily adopt IFRS if they have significant foreign activities or investors requiring IFRS-compliant reports.
The choice of standard significantly influences the structure of the COA, as each framework has different requirements for how financial transactions and balances are reported.
Compliance with the Canada Revenue Agency (CRA)
- Tax Reporting: The COA must facilitate accurate tax reporting and compliance with CRA regulations. This includes properly categorizing expenses and revenues, as these impact the calculation of taxable income and eligibility for tax credits and deductions.
- Audit Trail: A well-maintained COA should provide a clear audit trail for transactions to support claims made in tax filings and facilitate any reviews or audits conducted by the CRA.
Specific Industry Regulations
Some industries may have additional regulatory requirements affecting their COA:
- Financial Services: Banks, insurance companies, and other regulated financial institutions may have additional reporting requirements set by the federal Office of the Superintendent of Financial Institutions (OSFI).
- Healthcare: Medical practices must handle billing and expenses according to provincial healthcare billing regulations.
- Real Estate: Real estate businesses might need to account for trust accounts and other special types of financial handling specified by provincial real estate boards.
Legal Entity Structure
The structure of the business (e.g., sole proprietorship, partnership, corporation) affects how equity and withdrawals/distributions are accounted for in the COA:
- Sole Proprietorships and Partnerships: These entities might have simpler equity sections, often limited to owner's equity, withdrawals, and personal contributions.
- Corporations: More complex arrangements like retained earnings, common stock, preferred stock, and dividends are included in the COA.
Practical Steps for Compliance
- Regular Review and Audits: Regularly reviewing the COA with a professional accountant can help ensure compliance and identify areas needing adjustment due to regulatory changes or business evolution.
- Professional Guidance: When dealing with complex regulatory environments or significant changes in business structure or scope, consulting with accounting professionals or legal advisors is advisable to ensure that the COA meets all necessary standards and requirements.
Need Some Help Creating a Chart of Accounts? Let Enkel Handle It For You.
At Enkel, we help small business owners automate their back office with cloud-based technology and a team of professional accountants and bookkeepers. Whether your company is located in Vancouver, Edmonton, Calgary, or Toronto, we can get your chart of accounts set up and fully customized, and handle your bookkeeping and back office tasks while you stay focused on your business.
Contact us today to learn more.
Frequently Asked Questions
Who sets up your chart of accounts?
Typically, an accountant or bookkeeper will set up a chart of accounts for your business. They can ensure it aligns with your business's financial reporting needs and regulatory requirements. But you should stay involved in customizing your COA to ensure it reflects your goals and needs.
What is the definition of a chart of accounts?
A chart of accounts is an index of account names used to categorize transactions and keep your business’s financial history organized. It typically displays account names, details, identification codes and balances. There’s often an option to view all the transactions within a particular account, too.
What is the best way to structure a chart of accounts?
A chart of accounts is made up of five main accounts from the balance sheet and income statement: assets, liabilities, equity, revenue, and expenses. These accounts are universal, and your business may incorporate additional industry-specific accounts and subcategories within these accounts.
How do you set up a chart of accounts?
Accounting software typically gives you an out-of-the-box chart of accounts to work with; you can ask your bookkeeper or CPA to customize it to make sure it gives you everything you need.
