QuickBooks & systemsChart of Accounts for Small Business: How Many Accounts Is Too Many?

There's a myth in small business bookkeeping that more accounts means more control. Fourteen kinds of office supplies! A separate account for every software subscription! Surely that's what a well-run company looks like.

Then the profit and loss report runs four pages, and the owner reads one, sighs, and closes the laptop.

A chart of accounts for small business works a lot like a kitchen drawer organizer. A few sensible sections make everything easy to find. Forty tiny sections, and the spatula ends up on the counter anyway. This article covers how to size your chart, what a clean layout looks like, and the shortcuts that keep it from growing back.

What a chart of accounts actually is

Your chart of accounts is the master list of categories in your books. Every transaction lands in at least one of them, and every financial report is built by adding them up.

They fall into five families:

1. Assets: what the business owns, like cash, receivables (money customers owe you) and equipment.
2. Liabilities: what it owes, like credit cards, loans and payroll taxes not yet sent.
3. Equity: the owners' stake, including money put in, money taken out and past profits.
4. Income: what you earn from customers.
5. Expenses: what it costs to run the place, often split into cost of goods sold (COGS, the direct cost of delivering what you sell) and overhead.

The first three make up your balance sheet; the last two make up your profit and loss.

How many accounts is too many?

There's no official number, and anyone who tells you there is has probably never met a staffing firm and a bakery in the same week. A practical range for most small businesses is somewhere around 40 to 80 accounts in total, with most of the growth in expenses.

You've gone too far when you see any of these:

• Accounts with three transactions a year.
• Two accounts that nobody can tell apart ("Meals" and "Meals and Entertainment" and "Client Meals").
• A separate account for every vendor (that's what the vendor list is for).
• A separate set of accounts for each location or department. Every extra account is another decision someone makes on every transaction. More decisions, more coin flips.

You've gone too lean when big, different costs share one account. If "Contractors" holds both your freelance designers and your outsourced IT support, you can't see either clearly.

A chart of accounts example you can borrow

Here's a simplified chart of accounts example for a hypothetical eight-person digital agency. Numbering by family keeps things tidy: 1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for income, 5000s for cost of services, 6000s for overhead.

• 1000 Operating Checking, 1010 Savings, 1200 Accounts Receivable
• 2000 Accounts Payable, 2100 Business Credit Card, 2200 Payroll Liabilities, 2300 Deferred Revenue (cash received for work not yet done)
• 3000 Owner Contributions, 3100 Owner Distributions, 3900 Retained Earnings
• 4000 Retainer Revenue, 4100 Project Revenue, 4200 Reimbursed Expenses
• 5000 Direct Labor, 5100 Freelance Contractors, 5200 Media and Ad Spend Passed Through
• 6000 Salaries (admin), 6100 Payroll Taxes, 6200 Benefits, 6300 Rent, 6400 Software, 6500 Professional Fees, 6600 Travel, 6700 Meals, 6800 Insurance, 6900 Bank and Merchant Fees

That's around 25 core accounts; the real file would add a few for fixed assets and loans. Notice that "Software" is one account, not twelve. If the owner wants to know what they spend on a single tool, the vendor report already answers that.

Now say the same agency had grown its chart to 140 accounts over five years. A cleanup might merge the nine software accounts into one, fold "Office Supplies," "Office Expense" and "Supplies" into a single account, and move the three location-specific rent accounts back into one Rent account tagged by location. The P&L gets shorter. The answers get better.

How to set up a chart of accounts without regretting it

Here's how to set up a chart of accounts in a sensible order:

1. Start from your software's default list for your industry.
2. Write down the 5 to 10 questions you want your P&L to answer (gross margin by service line, for example).
3. Make sure each question has an account, or a class, that answers it.
4. Make inactive every account that doesn't serve a question.
5. Ask your CPA whether any account needs to stay separate for the tax return. Meals and entertainment are a common example.
6. Write a one-page coding guide: what goes where, with a few examples.

The coding guide is the unglamorous hero here. It's what keeps "Client lunch at the taco place" from landing in three different accounts depending on who's working that day.

If you're setting up QuickBooks from scratch, the chart is step two of a longer sequence, and our guide to QuickBooks Online setup in the right order walks through where it fits.

Accounts vs classes: the shortcut that keeps your chart small

The biggest source of chart bloat is trying to answer "which part of the business made money?" with accounts. Rent - Austin. Rent - Denver. Payroll - Design team. Payroll - Dev team.

QuickBooks has a better tool for that. Classes and locations let you tag a transaction with a department or a site while it stays in a normal account. You get one Rent account and a report that splits rent by location. The difference between those two features (and when to use each) is covered in our article on classes vs locations in QuickBooks.

Keeping the chart clean after day one

Charts of accounts grow the way closets do: one reasonable addition at a time. A few habits help:

• Make one person the gatekeeper for new accounts, and review the chart before year-end close.
• Make old accounts inactive rather than deleting them, so history stays intact.
• Read the P&L every month. If you can't explain a line, it's either miscoded or doesn't need to exist.

If reading the P&L every month sounds like homework, our guide on how to read a profit and loss statement in 10 minutes makes it a lot less painful.