What is a chart of accounts? Definition and FAQs

Published Friday 7 November 2025

Table of contents

• Chart of accounts (definition)
• How does a chart of accounts work?
• Example of COA categories
• How to set up your chart of accounts
• Get started with your chart of accounts
• FAQs on chart of accounts

Key takeaways

• Organise your chart of accounts using the five main account types (assets, liabilities, equity, revenue, and expenses) to ensure all business transactions are properly categorised and nothing gets lost or misplaced.

• Limit your chart of accounts to around twenty accounts for most small businesses, with each account having a clear name, brief description, and code number to maintain simplicity while providing adequate detail for financial reporting.

• Customise your chart of accounts with relevant subcategories that match your specific industry and business needs, such as utilities and marketing for expenses or product sales and consulting income for revenue.

• Review and refine your chart of accounts annually as your business grows or changes, adding new accounts or archiving unused ones to ensure it continues to meet your evolving business requirements.

Chart of accounts (definition)

A chart of accounts (COA) is a list of all the accounts you use to record financial transactions in your general ledger. (First use is correct, but ensure subsequent uses are spelled out or use the acronym consistently.) It shows you exactly where your money comes from and where it goes.

Your chart of accounts acts as a filing system for your business finances. The chart of accounts helps you

• Categorise transactions correctly so nothing gets lost or misplaced
• Group similar accounts together for clearer financial reporting
• Maintain consistent across your business operations

The five main account types organise all your business transactions:

• own (cash, equipment, inventory) in asset accounts
• owe (loans, unpaid bills, credit cards) in liability accounts
• invest and withdraw in equity accounts
• receive (sales, service fees, interest) in revenue accounts
• spend (rent, utilities, supplies) in expense accounts

The chart of accounts is organised under the five main account types.

You can customise your chart of accounts to fit your business. The main categories stay the same, but you can add subcategories for your industry.

Common subcategories include

• Expense subcategories: Utilities, office supplies, rent, marketing
• Revenue subcategories: Product sales, service fees, consulting income
• Asset subcategories: Bank accounts, equipment, vehicles

How many accounts should you have? Around twenty accounts works well for most small businesses. Each account needs a clear name, brief description, and a code number to help you categorise transactions quickly.

How does a chart of accounts work?

Your chart of accounts forms the backbone of your financial records. Every time you make a sale, pay a bill, or record an expense, the transaction is categorised into one of the accounts in your COA.

Sorting transactions in your chart of accounts powers your accounting software. Your data feeds into your general ledger, so your software can generate financial reports like profit and loss statements and balance sheets. This gives you clear, actionable insights.

Example of COA categories

A chart of accounts example showing the five main account types with subcategories within each.

A well-organised chart of accounts helps you make better business decisions by showing exactly where your money goes and comes from. You will spot spending patterns, identify your most profitable areas, and catch potential problems early.

It also simplifies financial reporting and tax preparation because everything is already categorised.

How to set up your chart of accounts

Setting up your chart of accounts is straightforward, especially with accounting software such as Xero accounting software. Here is how you can get started:

1. Start with a template from your accounting software
2. Customise your accounts to match your business
3. Assign account codes using a logical numbering system
4. Review and refine your chart of accounts annually

Get started with your chart of accounts

A well-organised chart of accounts is the foundation for clear financial reporting and confident business decisions. It simplifies your bookkeeping and gives you a real-time view of your financial health, so you can spend less time on your books and more time running your business. Try Xero for free to see the difference.

FAQs on chart of accounts

Here are answers to some common questions about the chart of accounts.

How many accounts should a small business have?

There's no magic number. It's best to start with the basics provided by your accounting software and add more only when you need a deeper level of detail. A typical small business might use between twenty and fifty accounts to get a clear picture of their finances.

What is a 7-digit chart of accounts system?

This is a more complex numbering system often used by larger organisations. Each digit can represent a different level of detail, like a department, location, or project. For most small businesses, a simpler three or four-digit system is more than enough.

Can I modify my chart of accounts after setting it up?

Yes, you can and should. As your business grows or changes, add new accounts or archive old ones you no longer use. Significant changes may require you to reclassify items in your financial statements, which affects comparative reporting. Review your chart of accounts with an advisor each year to ensure it still meets your needs.

What's the difference between assets and liabilities in a chart of accounts?

Assets are what your business owns, such as cash, equipment, and money owed by customers (accounts receivable). Liabilities are what your business owes, such as loans, credit card balances, and bills to suppliers (accounts payable).