Skip to content
Nika

What is a Chart of Accounts?

A Chart of Accounts (COA) is the structured, numbered list of every account a business uses to record its financial transactions. It is the index of the general ledger: each account has a unique code and a name, grouped by type — assets, liabilities, equity, income, and expenses. Every bookkeeping entry posts to one or more accounts in the COA, which is why getting the structure right from day one matters.

The standard numbering convention uses blocks of hundreds or thousands: 1000–1999 for assets, 2000–2999 for liabilities, 3000–3999 for equity, 4000–4999 for income, and 5000–9999 for expenses. Within each block, accounts are ordered from current to non-current (e.g. 1000 Cash, 1100 Accounts Receivable, 1500 Equipment). The numbering is not arbitrary — it mirrors how accounts will appear on the balance sheet and income statement, so a well-designed COA lets you produce clean financial statements directly from the trial balance.

A common mistake is creating too many accounts early on, which fragments the trial balance and makes reporting noisy. Best practice: start with 40–80 accounts for a typical small business, and add granularity only when a real reporting need appears — for example, splitting "Office Supplies" into "Stationery" and "IT Consumables" only once the owner actually wants to see those numbers separately. The COA should be stable year to year; constant restructuring makes period-over-period comparison impossible.

Example

A small consulting firm sets up a COA with five blocks: 1000s for bank and cash assets, 2000s for liabilities like VAT payable and Accounts Payable, 3000s for owner’s equity, 4000s for consulting revenue, and 5000s for expenses like rent, software subscriptions, and contractor fees. Every invoice and receipt is coded to one of these accounts, and the monthly income statement pulls straight from the 4000s and 5000s.

Questions

How many accounts should a small business Chart of Accounts have?

A typical small business needs between 40 and 80 accounts in its Chart of Accounts. Start lean and add accounts only when there is a genuine reporting reason. Too many accounts fragment reports and make the books harder, not easier, to read.

What are the five main account types in a Chart of Accounts?

The five types are: Assets (what you own), Liabilities (what you owe), Equity (owner’s stake), Income (revenue earned), and Expenses (costs incurred). The first three form the balance sheet; the last two form the income statement.

See how Nika handles this

Related terms