Handbook / Bookkeeping and cash

Chart of accounts for a small business: a simple setup that maps to your return

A chart of accounts is the list of categories your bookkeeping uses to sort every transaction. A good one makes your reports useful and your tax return quick. A bad one, with dozens of vague or duplicate categories, makes both harder. This guide shows a simple setup for a self-employed business.

The five account types

Every chart of accounts groups accounts into five types:

1. Assets: what the business owns, such as bank accounts, money owed by clients and equipment.
2. Liabilities: what the business owes, such as credit card balances, loans and sales tax collected.
3. Equity: the owner's stake, including money you put in and draws you take out.
4. Income: money earned from sales and services.
5. Expenses: the costs of running the business.

Income and expenses feed your profit and loss statement. Assets, liabilities and equity form the balance sheet.

Map expenses to your return

If you file Schedule C as a sole proprietor or single-member LLC, the form already gives you a ready-made list of expense categories. The 2025 form's expense lines include:

• advertising
• car and truck expenses
• commissions and fees
• contract labor
• depreciation and section 179 expense
• insurance (other than health)
• interest
• legal and professional services
• office expense
• rent or lease
• repairs and maintenance
• supplies
• taxes and licenses
• travel, and deductible meals
• utilities
• wages
• other expenses, listed separately

Naming your expense accounts after these lines means that at year end, your totals transfer directly to the form. You can add sub-accounts underneath, such as "Software" within other expenses, as long as each one rolls up to a single line. The guide to Schedule C explains each section of the form.

A sample chart for a solo service business

Assets

• business checking
• business savings or tax reserve
• accounts receivable
• equipment

Liabilities

• business credit card
• loan, if any
• sales tax payable, if you collect it

Equity

• owner contributions
• owner draws

Income

• service income
• product sales, if any
• refunds and discounts, as a negative income account

Expenses

• advertising
• bank and payment processing fees
• contract labor
• insurance
• legal and professional services
• office expense
• software and subscriptions
• supplies
• phone and internet
• travel
• meals
• vehicle
• education and training

Adjust to fit. A cleaning business needs a supplies account; a designer needs software.

Keep it short

Each extra account is another decision on every transaction. Signs your chart is too long:

• accounts with only one or two entries a year
• two accounts that could hold the same expense
• a large "miscellaneous" balance because nothing fits

Merge rarely used accounts and create a new one only when a category becomes large or you need to track it separately, for example a major client project or a grant.

Things that are not expenses

Some common mistakes:

• Owner draws are equity, not expenses.
• Loan principal repayments reduce a liability; only the interest is an expense.
• Equipment purchases are often assets that are depreciated or expensed under special rules rather than ordinary supplies.
• Personal spending does not belong in the business books at all.

Keep records behind each account

The IRS says you can choose any recordkeeping system suited to your business that clearly shows income and expenses, and that you must keep supporting documents. Your chart sorts the numbers; receipts, invoices and statements prove them.

Review regularly

During monthly reconciliation, scan for transactions in the wrong account. At year end, review the whole chart before you start next year. The guide on bookkeeping for the self-employed covers that routine.

Common questions when categorising

Some transactions are hard to place. A few practical conventions:

• Software subscriptions: a single "software and subscriptions" account, rolling up to office expense or other expenses, keeps them visible.
• Bank and payment processor fees: commissions and fees, or a dedicated sub-account, so you can see what accepting payments costs you.
• Phone and internet: record only the business share, and note how you worked it out.
• Mixed purchases: split a receipt between accounts rather than forcing it into one.
• Refunds to clients: a negative income account keeps gross sales accurate.

Write your conventions down in a one-page note. When you, a bookkeeper or a tax preparer look back months later, the note explains why each kind of transaction went where it did, and it keeps your categories consistent from year to year, which makes comparisons meaningful.

Use the five standard types, name expenses after your tax form's lines, keep the list short, and review it regularly.