What Is a Chart of Accounts? Examples by Industry
A chart of accounts is the full list of accounts a business uses to sort its transactions, usually numbered and grouped into assets, liabilities, equity, income and expenses. Every sale, bill and card charge is recorded in these accounts, and their totals become the balance sheet and the profit and loss statement.
When an HVAC tech buys $180 of copper fittings for a job, the bookkeeper files the charge under 5100 Job materials rather than 6400 Office supplies, so the cost shows up where the owner expects it.
What a chart of accounts does
Every transaction lands in the general ledger, the master record of all transactions sorted by account. The chart of accounts lists those accounts, with numbers, names and types but no amounts. The chart is the table of contents; the ledger is the book.
The chart decides what your reports can tell you. Asset, liability and equity accounts feed the balance sheet, a snapshot of what the business owns and owes on one date. Income and expense accounts feed the profit and loss statement (P&L), which shows what came in and went out over a period. If fuel and truck repairs share one account, no report can pull them apart later.
For most small businesses, no federal rule tells you which accounts to use. IRS Publication 583 says that, except in a few cases, the law does not require any specific kind of records, and you can choose any system that clearly shows your income and expenses.
The five types of accounts
Every account belongs to one of five groups:
- Assets, what the business owns or is owed, such as checking, trucks and accounts receivable (money customers still owe you).
- Liabilities, what the business owes, such as loans, card balances and accounts payable (vendor bills not yet paid).
- Equity, the owner's stake, including money put in, money taken out and profits kept from earlier years.
- Income, also called revenue, the money earned from customers.
- Expenses, the costs of earning that income, often split into cost of goods sold (direct job costs) and operating expenses (overhead).
The type matters more than the name. Set up owner's draws as an expense account and every draw shows up as a business cost. Profit looks smaller than it is, which misleads anyone reading the P&L, lenders included.
How chart of accounts numbering works
A common convention gives each account type its own first digit. The OpenStax accounting textbook lays it out this way: assets start with 1, liabilities with 2, equity with 3, revenue with 4 and expenses with 5. A small company might use 100-199 for assets and a larger one 1000-1999, and large manufacturers and merchandisers may add numbers starting with 6 and up.
Many small businesses use four digits, with job costs in the 5000s and overhead in the 6000s. That is a convention, not a rule. The exception is narrow: some regulated programs set their own chart. Handbook 4370.2 from HUD, the U.S. Department of Housing and Urban Development, lays out a uniform chart for HUD-insured multifamily (apartment) projects, so owners of those projects should check HUD's current requirements. Everyone else only needs numbers that stay consistent inside one set of books.
Two habits help. Number in tens or hundreds so new accounts fit, and never reuse a number. If 6600 meant Advertising last year and Uniforms this year, every comparison breaks.
Sample chart of accounts for a small trades business
Here is a starting chart for a plumbing or HVAC company with four trucks and about a dozen people.
| Number | Account | Type |
|---|---|---|
| 1000 | Operating checking | Asset |
| 1100 | Accounts receivable | Asset |
| 1500 | Trucks and equipment | Asset |
| 1590 | Accumulated depreciation | Asset (reduces 1500) |
| 2000 | Accounts payable | Liability |
| 2100 | Company credit cards | Liability |
| 2200 | Payroll liabilities | Liability |
| 2500 | Truck loans | Liability |
| 3000 | Owner's equity | Equity |
| 3900 | Retained earnings | Equity |
| 4000 | Service call revenue | Income |
| 4100 | Replacement and install revenue | Income |
| 5000 | Field labor | Cost of goods sold |
| 5100 | Job materials | Cost of goods sold |
| 5200 | Subcontractors | Cost of goods sold |
| 5300 | Equipment rental | Cost of goods sold |
| 6000 | Office salaries | Operating expense |
| 6100 | Vehicle fuel | Operating expense |
| 6200 | Insurance | Operating expense |
| 6300 | Rent and utilities | Operating expense |
| 6400 | Office supplies | Operating expense |
| 6500 | Small tools | Operating expense |
| 6600 | Advertising | Operating expense |
| 6700 | Meals, clients and travel | Operating expense |
| 6710 | Staff events | Operating expense |
The 5000s are job costs. Several of the 6000s, such as office salaries, rent and office supplies, are general and administrative costs, which our guide to G&A expenses explains. Meals get two accounts because client and travel meals are generally 50% deductible and staff holiday parties are generally fully deductible. Let your CPA name the equity accounts, which depend on how the business is organized.
The chart has no account per job, truck or crew. That detail goes in a separate field, such as a job, a class (a tag for a division or location) or a cost center, so the chart stays short. Contractors also add cost codes for the phase of work; our guide to construction cost codes covers that list.
Chart of accounts examples by industry
The five account types never change. What changes is which extra accounts each business needs and where the detail sits.
| Industry | Accounts to add | Common trap |
|---|---|---|
| Property management | Management fees, leasing fees, security deposits held (asset), security deposits owed (liability) | Deposits booked as income |
| Construction and trades | Retainage receivable, retainage payable, subcontractors, equipment rental | Job names in account names |
| Professional services | Project fees, monthly retainer income, reimbursable expenses billed, subconsultants | Billable costs buried in overhead |
A property manager keeps two sets of books: the company's own, which record its fees, and each owner's, which carry rent, repairs, utilities and the management fee.
Security deposits are the classic trap. The cash sits in an asset account, and the same amount sits in a liability account, because it belongs to the tenant until move-out. Book deposits as income and profit is overstated by money that has to be paid back.
For contractors, retainage is the part of each progress payment (a payment for work done so far) that a customer holds back until the job is finished. Retainage receivable is an asset you collect at completion; retainage payable is a liability, what you hold back from your own subcontractors.
For a consulting firm, the trap is a client-billed subconsultant or travel cost recorded as overhead, which hides what each project cost.
How many accounts is too many?
No rule sets a number. As a working view, most trades and property businesses under 50 people can run on 15 to 30 expense accounts. A P&L that runs past one printed page usually means the chart is tracking things that belong in other fields.
Other warning signs: an account gets a handful of transactions a year, or Supplies, Shop supplies and Materials sound so alike that people pick at random. A growing Miscellaneous account is another.
The test for each account: does it answer a question someone actually asks, or feed a line your tax preparer needs? If neither, merge it into a neighbor.
How to clean up a chart of accounts
Do it right after the year-end close, when the year's books are final.
- Pull 12 months of activity for every account, with transaction counts.
- Mark each account keep, merge or retire, and write a one-line description for every keeper.
- Review the plan with your CPA, since each account feeds a line on your tax return.
- Move job, property and person detail out of account names and into classes or job fields.
- Merge duplicates, make retired accounts inactive, then update bank rules (the auto-categorizing rules on your bank feed) and connected apps.
In QuickBooks Online, you can't delete an account, only make it inactive, which keeps its transactions on your reports, or merge it. A merge is permanent and moves all past transactions into the account you keep. To merge, rename the duplicate so its name, account type and detail type (QuickBooks' sub-category for the account) exactly match the keeper. Intuit says not to merge accounts connected to online banking.
Keep those one-line descriptions. Publication 583 says that if you keep books in software, your documentation of that system must show your charts of accounts and detailed account descriptions.
How to keep the chart from drifting
A chart drifts when the people coding expenses don't know it. Clyr syncs the chart of accounts from QuickBooks, Xero, Sage Intacct or NetSuite, so expenses are coded against the accounts your books actually use. Its coding rules set the GL account by vendor, amount or card, and AI suggestions drawn from your own coding history apply only when they clear a confidence threshold. Update those rules after any cleanup.
FAQs
Yes. Adding an account or fixing a name is harmless at any time. Merging and renumbering change the history behind reports already used, so if you sent a P&L to a lender or filed a return, save a PDF of those reports first. Then make the change right after a month-end close and tell everyone who codes expenses.
No. Tax law doesn't require them, and plenty of small companies run on names alone. Numbers pay off once the chart passes a few dozen accounts or when people code by typing instead of scrolling. They also fix the report order, so new accounts don't jump around the list alphabetically.
Cost of goods sold covers the direct costs of the work you sell, such as materials, field labor and subcontractors. Operating expenses are the overhead. A contractor with $400,000 of revenue and $260,000 of job costs has a gross profit of $140,000, or 35%. If $30,000 of materials gets coded to overhead, gross margin shows 42.5%. Net profit doesn't change, which is why the error can survive for years.
A sub-account rolls up into a parent account. A Vehicles parent might hold sub-accounts for fuel, repairs and insurance, and the P&L can show the parent total or each piece. One catch in QuickBooks Online: an account can't be made inactive while it still has sub-accounts, so a cleanup has to move those sub-accounts under another parent first.
