How Do You Categorize a Chart of Accounts?
The Chart of Accounts (COA) is the foundation of your bookkeeping system – but it’s only as useful as the way it’s structured. Categorizing your COA properly ensures accurate reports, better budgeting, and smoother tax filing.
This guide explains how to categorize a chart of accounts step by step, including common account types, naming conventions, and best practices for small businesses.
What Is a Chart of Accounts?
A chart of accounts is a list of all the accounts your business uses to record financial transactions. Each account belongs to a broader category – such as income or expense – and serves a specific purpose in your books.
The COA helps organize your financial data for accurate profit & loss statements, balance sheets, and cash flow reports.
The Five Main Categories in a Standard COA
Every account in your chart of accounts falls under one of these five core types:
1. Assets
These are the things your business owns. Common asset accounts include:
- Cash
- Accounts receivable
- Inventory
- Equipment
- Prepaid expenses
- Fixed assets
2. Liabilities
These are what your business owes to others. Typical liability accounts:
- Accounts payable
- Credit cards
- Loans payable
- Payroll liabilities
- Taxes owed
3. Equity
Equity represents the owner’s stake in the business. It includes:
- Owner’s capital
- Retained earnings
- Owner’s draw or distributions
4. Income (Revenue)
These accounts record the money your business earns:
- Sales income
- Service income
- Rental income
- Interest income
5. Expenses
Expenses are costs incurred to run your business. Examples include:
- Rent
- Utilities
- Marketing
- Office supplies
- Professional services
- Payroll
Each of these categories may be broken down further using sub-accounts for better tracking.
Numbering and Naming Conventions
Many businesses use account numbers to organize the COA logically:
| Range | Category | Example Account |
| 1000-1999 | Assets | 1010 – Checking Account |
| 2000-2999 | Liabilities | 2100 – Credit Card |
| 3000-3999 | Equity | 3100 – Owner’s Capital |
| 4000-4999 | Income | 4100 – Service Revenue |
| 5000-5999 | Expenses | 5200 – Marketing Expense |
You don’t have to use numbers, but they help with sorting and consistency, especially in software like QuickBooks or Xero.
How to Categorize Accounts Effectively
- Start with the basics
Create one account for each major category. Avoid going overboard – 30-60 accounts is standard for most small businesses. - Add sub-accounts where needed
For example, under “Marketing Expense,” you might include:- 5210 – Digital Ads
- 5220 – Print Ads
- 5230 – Event Sponsorships
- Be consistent
Stick to a logical naming and numbering system so you and your bookkeeper can navigate it easily. - Customize for your industry
If you run a construction firm, you might need job costing accounts. A law firm may need trust accounts. Tailor your chart accordingly. - Update as you grow
Add or merge accounts as your business evolves. A good bookkeeper will review your COA quarterly or annually for optimization.
Test Case: Professional Services Firm Cleans Up COA
Business: Mid-size marketing agency with 12 employees
Problem: Their chart of accounts had over 150 expense categories, many redundant or unused. Financial reports were cluttered and confusing.
Solution: RemoteBooksOnline reviewed and streamlined their COA, reducing expense categories by 40% and grouping items logically.
Results:
- Reports became easier to read
- Owner gained better visibility into spending by department
- Tax preparation was simplified due to better categorization
Frequently Asked Questions
Do I need to use account numbers?
No, but using numbers can make sorting and report filtering easier, especially in accounting software.
How many accounts should a small business have?
Most small businesses function well with 30–60 accounts. More than that can add complexity unless justified by business structure.
Can I change my chart of accounts later?
Yes, but changes should be made carefully. Reassigning or deleting active accounts can affect historical reports.
What’s the difference between an account and a sub-account?
An account is a primary category (e.g., Rent Expense), while a sub-account is a breakdown of that category (e.g., Office Rent, Warehouse Rent).
Should I build my COA myself or get help?
It’s best to work with a bookkeeper or accountant, especially if you’re just starting out or managing multiple revenue streams. RemoteBooksOnline includes COA setup as part of our monthly bookkeeping services.
Keep Your Chart of Accounts Clean and Custom-Fit
A well-structured chart of accounts is the key to accurate books and meaningful insights. Whether you’re setting one up for the first time or cleaning up a mess, RemoteBooksOnline can help you organize your COA for clarity and control.
Explore our bookkeeping services or request a free trial today to see how organized your financials can be.
