Nobody opens a business because they’re excited about the chart of accounts. You open one because you’re good at roofing, dentistry, or making very good coffee in Edwardsville, and the bookkeeping shows up later like a houseguest who brought more luggage than expected.
The chart of accounts is the part of that bookkeeping that decides whether your financial reports tell you anything useful.
When it’s set up well, your profit and loss statement shows you which services make money and where the cash went last quarter. When it’s set up badly, you get a report that is technically accurate and about as helpful as a weather forecast that just says “weather.”
We’ve built and cleaned up a lot of these bookkeeping fundamentals for Illinois small businesses across the Metro East, St. Louis, and Chicago, and we eventually turned the structure we use into a free chart of accounts template.
We’ll walk through the thinking behind it here, and you can grab the template whenever you’re ready to put it into QuickBooks.
What Is A Chart Of Accounts, And Why Should You Care?
A chart of accounts is the list of every category your business uses to record money coming in and money going out. Each transaction gets assigned to one of those categories, whether it’s a customer payment, a box of printer paper, or the rent on your shop. Your bookkeeping software then adds up each category to build your profit and loss statement and your balance sheet.
That means your reports can only be as detailed as the list underneath them. If office supplies, equipment repairs, and the holiday party all land in one account called Miscellaneous, your reports will faithfully tell you that you spent a lot of money on miscellaneous things. That’s true, but it won’t help you decide what to cut, spot a deduction, or explain your numbers to a lender.
A clean chart of accounts also makes your monthly bookkeeping faster and your tax return cheaper, because nobody has to re-sort a year of transactions in March while the deadline stares at them.
Every good chart of accounts starts with the same five sections.
The Five Sections, And The Numbering That Keeps Them In Order
Every chart of accounts is built on the same five sections. Assets are what the business owns, like cash, money customers owe you, equipment, and inventory. Liabilities are what the business owes, like credit cards, loans, unpaid vendor bills, and payroll taxes you’ve withheld but haven’t sent in yet. Equity is what’s left over for the owners. Revenue is what you earn, and expenses are what it costs you to earn it.
Most bookkeepers number accounts in ranges so the sections stay in order. Assets sit in the 1000s, liabilities in the 2000s, equity in the 3000s, revenue in the 4000s, and costs and expenses come after that. It looks a little fussy, but it means a new account always lands in the right neighborhood, and anyone who opens your books later can find their way around without a tour guide.
Our template uses that same numbering and leaves gaps between account numbers, so you can add an account next year without renumbering everything that comes after it.
Why The Default QuickBooks Chart Of Accounts Usually Needs Work
When you set up QuickBooks Online or Xero, the software hands you a default chart of accounts. It’s a reasonable guess at what a generic business might need, and the trouble is that very few businesses are generic. A landscaping company, a law office, and an online shop all get roughly the same list, so each of them ends up with accounts they’ll never use and without the ones they need most.
The better approach is to start with a solid core and then add the accounts that match how your business earns and spends money. That’s how we built the template. It has a core chart every business needs, plus four industry add-ons you can drop in. The service business add-on splits hourly, project, and retainer revenue. The retail add-on covers inventory, e-commerce platforms, packaging, and shrinkage. The professional services add-on includes client trust accounts and licensing costs, and the contractor add-on handles job costing, change orders, permits, and small tools.
Each row in the template also lists the QuickBooks account type and detail type, which are the two dropdowns QuickBooks asks for when you create an account. Picking the wrong account type is an easy mistake to make, and it can quietly put an account in the wrong place on your reports.
How Much Detail Does A Small Business Chart Of Accounts Need?
You want enough detail to answer the questions you actually ask about your business, and not much more. A good test is whether you’d make a different decision if you could see that number on its own. If you’d want to know what you spend on fuel compared with vehicle repairs, they deserve separate accounts. If nobody has ever wondered about paper clips separately from other office supplies, they can share an account.
The two mistakes we see most often are opposites of each other. The first is a chart with sixty expense accounts for a business that has about a dozen real kinds of costs, so every line on the profit and loss statement is a small number, and nothing stands out. The second is a chart where a catch-all account like General Expenses ends up holding a big share of total spending. Both make the report hard to read; they just get there from different directions.
It’s worth giving revenue a little more detail than you think you need. If you sell three different services, tracking each one in its own account is how you find out which of them is quietly carrying the other two.
There are also a few things Illinois businesses tend to leave out of the chart entirely.
A Few Accounts Illinois Businesses Tend To Forget
Some of the most commonly missing accounts are the ones that hold money that isn’t really yours. If you sell taxable goods in Illinois, the sales tax you collect from customers belongs to the state until you send it in. It should sit in a Sales Tax Payable liability account, because recording it as revenue makes your sales look better than they are right up until the payment is due.
Payroll works the same way. The federal and Illinois income tax you withhold from paychecks, along with Social Security and Medicare, are liabilities until they’re deposited, and the template gives each of them its own account. If you’re about to hire, our guide to payroll setup for a first employee in Illinois covers the registrations that need to happen before the first paycheck goes out.
Illinois also charges a replacement tax at the entity level on S corporations and partnerships, which tends to surprise owners who assumed a pass-through business never pays tax itself. Giving it its own account keeps it from disappearing into a general taxes line, and it’s one of the things we look at as part of our business tax planning work.
Your Chart Of Accounts Should Already Know Where Everything Goes At Tax Time
Your tax return sorts income and expenses into the IRS’s own categories, like the lines on Schedule C for a sole proprietor or Form 1120-S for an S corporation. Your chart doesn’t have to match those lines exactly, but it helps a great deal when every account maps cleanly to one line on the return.
That mapping is where messy books get expensive. An account called Vehicle Stuff that mixes fuel, repairs, insurance, and the occasional trip to the lake has to be pulled apart one transaction at a time before any of it can go on a return. When the accounts are clean, your CPA can take the year-end trial balance and carry it onto the return without a scavenger hunt.
The tax mapping tab in our template lists the Schedule C and Form 1120 line for each account, so the year-end translation is done before the year even starts.
Clean books also make it easier to see what qualifies when your CPA looks at deductions tied to business income. If you run a sole proprietorship, partnership, or S corporation, it’s worth reading our overview of the Section 199A QBI deduction. It explains how the deduction works for pass-through owners in Illinois and Missouri.
How Often Should You Clean Up Your Chart Of Accounts?
Once a year is a good rhythm, and fall is the best time because you’re already looking at the books before year-end. Look for accounts that are holding things they were never meant to hold, which usually means you need a new account. Then look for accounts that haven’t seen a transaction in a couple of years, which you can usually make inactive. QuickBooks lets you deactivate an account without deleting it, so the history stays intact.
A change in the business is also a good reason to review it partway through the year. Adding a service line, hiring your first employee, signing a lease, or buying a company vehicle will usually call for a new account or two. If you work with a CPA, run the bigger changes past them first, because moving categories around halfway through a year makes it harder to compare this year with last year.
The template also includes the monthly reconciliation checklist our team uses on client books. Reconciling every month is what keeps the annual cleanup from turning into an archaeology project.
Start With The Template, And Call Us If You Want Help Setting It Up
You don’t have to build a chart of accounts from a blank screen. Our free chart of accounts template gives you the core structure, the four industry add-ons, a setup guide that explains what goes in each account, the monthly reconciliation checklist, and the tax mapping. It’s set up for QuickBooks Online, and it lands in your inbox as soon as you enter your email.
If you’d rather have someone set it up with you, or your current books need some untangling first, that’s the work our bookkeeping and accounting team does every week. If you’re hiring soon, our first employee payroll guide is a good next read.
Reach out to Thompson Flaherty and we’ll look at your chart of accounts together.
Until next time.
