Chart of Accounts

What Is a Chart of Accounts?

A chart of accounts (COA) is the complete, organized list of every financial account a business uses to record its transactions. Think of it as the filing system for all financial activity — every dollar that comes in or goes out gets assigned to an account in the COA. The chart provides the structure that makes financial statements possible.

Standard Account Categories

Every chart of accounts organizes accounts into five major categories that correspond to the sections of financial statements:

Assets — What the business owns or is owed. Subdivided into current assets (cash, accounts receivable, inventory) and long-term assets (equipment, property, intangibles).

Liabilities — What the business owes. Includes accounts payable, loans, accrued expenses, and deferred revenue.

Equity — The owner's interest in the business: paid-in capital, retained earnings, and owner draws.

Revenue — Income from business operations: sales, service fees, interest income.

Expenses — Costs incurred to run the business: rent, utilities, payroll, software subscriptions, professional services, cost of goods sold.

Account Codes and Numbers

Most COAs assign a numeric code to each account. A common convention:

• 1000–1999: Assets
• 2000–2999: Liabilities
• 3000–3999: Equity
• 4000–4999: Revenue
• 5000–5999: Cost of Goods Sold
• 6000–6999: Operating Expenses

These codes make it easy to sort, filter, and reference accounts consistently. In accounting software, you reference accounts by name or code when entering transactions.

How the COA Relates to Invoice Coding

When a vendor invoice arrives, someone must decide which expense account to assign it to — this is called "coding" the invoice. A utilities bill goes to the Utilities account (e.g., 6100). A software subscription goes to Software & Subscriptions (e.g., 6400). A contractor invoice goes to Professional Services (e.g., 6200).

This is often the step in AP processing that requires the most human judgment — automated extraction can pull the vendor name, amount, and date, but deciding which GL account the expense belongs to often depends on knowledge of the business's COA structure and expense policies.

Default COAs in QuickBooks Online and Xero

QuickBooks Online provides a default chart of accounts when you create a company, organized by industry type. Common expense accounts in the QBO default COA include: Advertising & Marketing, Insurance, Legal & Professional Services, Office Expenses, Rent or Lease, Utilities. You can add, rename, and reorganize accounts freely.

Xero similarly provides starter COAs by country and business type, with accounts like Office Expenses (429), Repairs and Maintenance (443), and Wages and Salaries (477). Xero's COA uses a track and reporting framework that allows more flexible classification.

Customizing Your COA

A well-designed COA is specific enough to provide useful reporting without being so granular that coding becomes a burden. Best practices: don't create a new account for every vendor, keep the number of expense accounts manageable (20–40 for most SMBs), and align account names with how the business owners think about their spending categories.