What is a chart of accounts? Definition and FAQs

Published Monday 13 October 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) and customise subcategories to match your specific business operations and industry needs.

• Start with around 20 accounts for most small businesses, using a template from your accounting software as a foundation and adding or removing accounts based on your actual business transactions.

• Assign logical account codes using a numbering system where each account type starts with a specific digit (such as assets with '1', liabilities with '2') to make organising and finding accounts much easier.

• Review and refine your chart of accounts periodically as your business evolves, ensuring it continues to reflect your current operations and provides the detailed financial insights you need for decision-making.

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. It shows you exactly where your money comes from and where it goes.

Your chart of accounts organises 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 bookkeeping across your business operations

The five main account types organise all your business transactions:

1. asset accounts – cash, equipment, inventory and other things your business owns
2. liability accounts – loans, unpaid bills, credit cards and other debts your business owes
3. equity accounts – owner investments and withdrawals from the business
4. revenue accounts – sales, service fees, interest and other money your business receives
5. expense accounts – rent, utilities, supplies and other money your business spends

How many accounts should you have? Around 20 accounts works well for most small businesses. Each account needs a clear name, a brief description and a code to help you categorise transactions quickly.

How does a chart of accounts work?

Your chart of accounts organises your business finances. Every time money moves in or out, you record it in a specific account. This helps you see detailed information about your income and expenses.

For example, instead of seeing only expenses, you can see exactly how much you spent on rent, office supplies or marketing. This detail helps you create accurate financial reports such as your profit and loss statement and balance sheet, so you have a clear view of your business's health.

Example of COA categories

The chart of accounts is organised under the five main account types. While the five main accounts at the top stay the same, the accounts that sit underneath can be customised to suit your business. For example, within expenses you could have subcategories for utilities, office expenses and rent.

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

It also makes financial reporting and tax preparation easier because everything is already properly categorised. For example, the Australian Taxation Office requires business records to be kept for 5 years, a legal requirement that is easier to meet when all transactions are organised correctly from the start.

How to set up your chart of accounts

Setting up your chart of accounts is simpler than it sounds, especially with accounting software like Xero. Here's how you can approach it:

1. Start with a template

Most accounting software provides a default chart of accounts based on your industry. This is a great starting point.

2. Customise for your business

Review the default accounts. Add any that are specific to your business, such as software subscriptions or vehicle expenses. Remove any you do not need to keep things tidy.

3. Assign account codes

Use a logical numbering system. For example, all asset accounts might start with '1', liabilities with '2', and so on. This makes organising and finding accounts much easier.

4. Review and refine

Your business will evolve, and so should your chart of accounts. Revisit it periodically to make sure it still reflects how your business operates.

Get started with your chart of accounts

A well-organised chart of accounts is the foundation of clear financial reporting. It takes the guesswork out of your bookkeeping and gives you the insights you need to make confident business decisions.

By categorising your transactions correctly from the start, you save time, reduce stress at tax time and gain a true understanding of your financial position.

Try Xero for free to see how easy it can be.

FAQs on chart of accounts

Find answers to common questions about chart of accounts below.

How many accounts should a small business have?

Start with the standard accounts for your industry and add more when you need more detail. Aim for clarity and simplicity so you can easily manage your bookkeeping.

What is a 7-digit chart of accounts system?

A seven-digit system is a more detailed way of organising accounts, often used by larger or more complex businesses. Each digit represents a different level of classification, such as a department, location or project. For most small businesses, a simpler three or four-digit system is usually enough.

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

Yes. Your chart of accounts should grow with your business. You can add new accounts as you take on new expenses, or archive old ones you no longer use. Review it with your accountant or bookkeeper each year.

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

Assets are what your business owns, such as cash, equipment and inventory. Liabilities are what your business owes, such as loans, credit card balances and supplier bills. Both are important for understanding your overall financial health on the balance sheet.