What it is
Every transaction is assigned to an account: assets, liabilities, equity, income or expenses. The chart of accounts is the full list. Your profit and loss and balance sheet are built from it.
Start small
Use your software's default chart for your industry, then remove unused accounts and add only what you need to see separately. Fifty to seventy accounts is plenty for most small businesses.
Common structure
Income by type of revenue. Cost of goods sold for direct costs. Operating expenses grouped by purpose: rent, insurance, payroll, software, marketing, professional fees, travel and meals, vehicle. Separate liabilities for sales tax payable and payroll taxes. Owner draws or distributions in equity, not expenses.
Mistakes to avoid
Using "miscellaneous" for everything. Creating a new account for every vendor. Putting owner spending in expenses. Mixing loan principal with expense.
Ask your tax preparer
The categories should line up with the lines on your tax return. A short call with your preparer can save time at year end.
Common questions
Can I change my chart of accounts later?
Yes. Merging or renaming accounts is simple in most programs, and a bookkeeper can restructure it.
Should I use classes or tags?
Only if you track separate locations, projects or departments.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.