A Small Business Owner’s Guide to Simplifying Your Chart of Accounts

Setting up your Chart of Accounts (COA) might not be the most glamorous part of running a business, but it can be one of the most important. In this guide, we’ll help you understand what a COA is, walk you through how-to build one, and offer practical tips to increase clarity in your numbers. After reviewing dozens of small business books, one thing’s clear: even when clients swear their books are “clean,” the COA usually tells a messier story. And while QuickBooks Online (QBO) is fantastic for ease of use, it’s also way too easy to keep adding accounts until your chart starts to look like a junk drawer.

So what the heck is a Chart of Accounts?

A Chart of Accounts is basically your business’s financial backbone. It’s the master list of all the categories you use to track what your business owns, owes, earns and spends. These accounts fall into five main categories. 

Assets

What your business owns. This includes bank accounts, accounts receivable, inventory, equipment, property, etc. 

Liabilities

What your business owes. This includes credit cards, loans, payroll taxes, sales tax collected but not paid. 

Equity

The owner's interest in the business. This includes capital contributed to the business, accumulated profits, and owner’s draw.

Income (or Revenue)

The money  your business earns from selling products and services. This also includes other income from refunds, interest earned, etc. 

Expenses

What your business spends to operate. This includes things like materials, subcontractors, employees, rent, and office supplies. 

Every transaction in your business needs to fall into one of these categories. When your chart of accounts is cluttered or too complex, your reports lose meaning. Business performance is hard to measure, and tax season turns into a guessing game. Simplifying your chart of accounts brings the clarity you need to confidently run your business.

Step 1: Start with Your Tax Return

Before you build your chart of accounts from scratch, look at your business tax return. Since your bookkeeping will very likely be primarily for tax purposes, starting with accounts that the IRS expects to see helps keep your setup IRS aligned. 

Whether you file as a sole proprietor, S Corp, or partnership, start with your tax form. The categories listed there are the foundation of a clean, IRS-aligned chart.

Step 2: Add Industry- and Business-Specific Accounts

Once you’ve set up the basics from your tax return, it’s time to tailor your chart of accounts to fit your business. Most tax forms lump a bunch of legitimate expenses into one vague category—“Other Business Expenses.” That might be fine for filing, but it’s not great for managing or understanding your business.

For your bookkeeping, these expenses should be named and grouped clearly. Think Dues and Subscriptions, Software Expense, Continuing Education, or Recruiting Tools if you’re a staffing agency. The goal is to create just enough detail so your financial reports are useful, without going overboard and creating an account for every different variation you can think of.

Step 3: K.I.S.S. — Keep It Super Simple

Your chart of accounts is meant to give you a high-level view of your business finances, not a play-by-play of every receipt and transaction. This isn’t the place for granularity. If your COA has 200+ accounts, it’s no longer a chart. It’s a novel.

Want more insights? There are other ways to add extra details into your data. But keep your chart of accounts lean, logical, and easy to navigate. Simpler books mean smarter decisions.

TL;DR

• Start with your tax return. It’s your built-in blueprint and keeps your books aligned with IRS expectations.

• Customize for your industry. Break out “Other Expenses” into meaningful categories that make sense for how you operate.

• Keep it simple. Your COA is for clarity, not chaos. Don’t turn it into a spreadsheet nightmare.

A clean, well-structured chart of accounts helps you see your business clearly and make better decisions. You don’t need 200 accounts. You need the right 50 (give or take) and consistency in how you use them.

When in doubt, less is more. 

Ready for a chart of accounts that actually makes sense? We’ll help you clean it up, simplify your structure, and make sure your bookkeeping actually works for your business. [Let’s Chat]