Setting up a chart of accounts – practical guide for new businesses.

Chart of accounts design principles

A chart of accounts organizes every financial transaction into standard categories. Good COA design follows these principles:

1. Start with standard structure

Every COA has the same top-level categories (in this order):

• Assets (1000-series typically): cash, AR, inventory, fixed assets, intangibles
• Liabilities (2000-series): AP, accrued expenses, deferred revenue, loans, notes payable
• Equity (3000-series): owner contributions, retained earnings, distributions
• Revenue (4000-series): sales, service revenue, other income
• Cost of goods sold (5000-series): direct product costs, direct labor
• Operating expenses (6000-series): everything else operating
• Other income/expense (7000-8000-series): interest, taxes, one-time items

Within each category, subdivide to useful granularity. Not too flat (everything in one bucket is useless), not too detailed (100 expense accounts is unmanageable).

2. Match your decision-making granularity

If you need to know "how much are we spending on Facebook ads" to make decisions, you need a separate account (or class/dimension) for Facebook ads. If marketing is all one decision, one "Marketing" account works. The COA should match how you actually think about your business, not be more granular "just in case."

3. Use classes/dimensions for cross-cutting categorization

Don't duplicate accounts for every dimension. Instead of creating separate "Marketing – East Region" and "Marketing – West Region" accounts, use one Marketing account with a Region class/dimension. This is a huge efficiency gain as you scale.

4. Design for reporting, not just recording

Think about what reports you'll want to produce: monthly P&L, budget vs actual, tax-ready categorization, board package. Design COA so these reports group naturally.

5. Plan for growth

Leave numbering gaps so you can add accounts without renumbering. Use 4010-4090 for revenue so 4015 and 4025 can be added later.

Industry-specific COA additions

SaaS / subscription businesses

Add: 2310 Deferred revenue current, 2320 Deferred revenue long-term, 4010 ARR subscription revenue, 4020 Implementation/onboarding revenue, 4030 Professional services revenue, 5060 Hosting and infrastructure, 6310 Customer acquisition cost (CAC) by channel.

Ecommerce

Add: 1210 Inventory – raw materials, 1220 Inventory – finished goods, 1230 Inventory – in transit, 2260 Sales tax collected by state, 5015 COGS by SKU category, 5040 Marketplace fees (Amazon, eBay), 5045 Chargebacks and returns, 6310 Advertising by channel (Meta, Google, TikTok).

Professional services

Add: 1110 Unbilled time (WIP), 2310 Client retainers / unearned revenue, 4010 Billed revenue by practice area, 6410 Business development expense, 6420 Continuing education.

Construction

Add: 1210 Inventory – materials, 2330 Billings in excess of costs (overbillings), 1220 Costs in excess of billings (underbillings), 4010 Contract revenue by project type, 5010 Direct job costs – materials, 5020 Direct job costs – labor, 5030 Direct job costs – subcontractors, 6310 Indirect job costs (supervision, equipment).

Nonprofits

Completely different structure. Statement of Financial Position instead of Balance Sheet; Statement of Activities instead of P&L. Fund accounting with restricted vs unrestricted net assets. See nonprofit bookkeeping guide.

Law firms

Add: 1110 Trust account (separate from operating cash), 2310 Client trust liabilities, 4010 Fee revenue by practice area. Trust accounting is separate ledger from operating. See law firm bookkeeping guide.