Guide Get your books done

← All articles

Chart of Accounts: How to Set Up Bookkeeping Categories That Work

July 8, 2026 · TwoDayBooks

Your chart of accounts is the backbone of your bookkeeping. It's the list of categories where every transaction lands — income, expenses, assets, liabilities, and equity. Get it right and your books stay clean. Get it wrong and you'll spend hours re-categorizing transactions at tax time.

What a Chart of Accounts Actually Does

Every dollar that moves through your business gets sorted into a category. Revenue from a client payment goes to an income account. Your software subscription goes to an expense account. The loan you took out goes to a liability account. The chart of accounts is just the master list of those buckets.

When it's set up well, you can pull a Profit and Loss report and immediately see where your money is coming from and where it's going. When it's messy — too many accounts, vague names, inconsistent categorization — your reports become noise.

Start Simple, Then Expand

The biggest mistake small-business owners make is creating too many accounts upfront. You don't need separate categories for office paper and office pens. One "Office Supplies" account is enough.

A reasonable starting point for a service-based business:

  • Income: Sales or Service Revenue
  • Cost of Goods Sold: Contractor labor, materials (if applicable)
  • Expenses: Advertising, Bank Fees, Contractors, Insurance, Legal & Professional, Office Supplies, Rent, Software/Subscriptions, Telephone, Travel, Meals, Utilities, Wages & Payroll
  • Assets: Checking, Savings, Petty Cash, Undeposited Funds
  • Liabilities: Credit Cards, Loans Payable, Sales Tax Payable (if applicable)
  • Equity: Owner's Contributions, Owner's Draws, Retained Earnings

A product-based business would add Inventory and Cost of Goods Sold accounts. A business with employees would add Payroll Liabilities. But the principle is the same: start with the categories you actually need, not the ones you think you might need someday.

Naming Matters More Than You Think

Name your accounts clearly. "Marketing" is vague. "Advertising and Marketing" is better. "Online Advertising" might be more specific than you need.

The goal is consistency. If your CPA asks what's in "Miscellaneous," and you can't remember, that account isn't serving you. Aim for names where you'd know what goes in them without thinking about it.

Avoid accounts like "Ask My Accountant" — they become dumping grounds for transactions you didn't want to deal with. If you're unsure where something goes, put it in the closest reasonable account and flag it for review. Don't create a permanent holding pen.

Numbering Your Accounts

Most bookkeeping software assigns numbers automatically, but understanding the structure helps. A standard numbering system uses ranges:

  • 1000s: Assets
  • 2000s: Liabilities
  • 3000s: Equity
  • 4000s: Income
  • 5000s: Cost of Goods Sold
  • 6000s–8000s: Expenses

This matters because it keeps your accounts organized on reports. If you add a new expense account later, it lands in the right range instead of floating to the bottom of the list.

Common Setup Mistakes to Avoid

Creating sub-accounts you don't use. Sub-accounts can be useful — say, breaking down Travel into Airfare, Lodging, and Ground Transportation. But if you only travel once a year, don't bother. Sub-accounts add complexity. Use them only when the detail genuinely helps you make decisions.

Duplicate accounts. "Software" and "Subscriptions" and "SaaS Tools" are probably the same thing. Pick one name and stick with it.

Forgetting equity accounts. Sole proprietors and single-member LLCs need Owner's Contributions and Owner's Draws. Without them, you have nowhere to record money you put into or take out of the business.

Letting your chart of accounts grow without pruning. Every time you encounter an unfamiliar transaction, the temptation is to create a new account. Resist that. Most transactions fit into existing categories if you're honest about it.

When to Revise Your Chart of Accounts

Your chart of accounts isn't set in stone. As your business grows, you'll need to add accounts. The key is adding them deliberately, not reactively.

A good rule: if you're seeing the same type of transaction more than a few times a month and it doesn't fit cleanly in an existing account, create a new one. If it's a one-off, categorize it in the closest existing account and move on.

Review your chart of accounts quarterly. Look for accounts with zero or near-zero activity — they may be candidates for removal. Look for accounts with surprisingly high activity — you may want to break them into sub-accounts for better visibility.

Also check for accounts that are catching unrelated transactions. If "Office Supplies" has grown to include software, furniture, and coffee, it's time to split things up.

The Payoff of Getting It Right

A clean chart of accounts means your Profit and Loss report tells you something useful. You can see which expense categories are growing, whether your margins make sense, and whether you're spending more than you expected on contractors or software. It also makes tax prep far less painful — your CPA can map your accounts to tax lines without guessing.

If setting up or cleaning up your chart of accounts sounds like more than you want to tackle on your own, TwoDayBooks can help. We handle done-for-you bookkeeping for U.S. small businesses, and getting your categories right is one of the first things we sort out.