How to Set Up a Chart of Accounts

A well-structured chart of accounts is one of the foundations of good accounting. It acts as a roadmap for organizing your financial data and helping you track income, expenses, and assets.

Whether you run a small business or manage a growing team, a chart of accounts makes it easier to prepare accurate financial reports and record every transaction correctly.

Key takeaways

• A chart of accounts is a complete list of all accounts used to record business transactions.
• It helps organize financial data across assets, liabilities, equity, income, and expenses.
• Properly structured accounts make reporting and compliance easier.
• Numbering, naming conventions, and categories help keep your chart of accounts organized.
• Intuit QuickBooks business tools can simplify setup and ongoing maintenance.

What is the chart of accounts?

A chart of accounts is a structured list of all the financial accounts a business uses to record transactions. It acts as a filing system, grouping similar transactions so you can monitor performance and stay compliant with financial standards. This structure helps you understand where money is coming from, where it’s going, and how your business is tracking overall.

A chart of accounts list typically includes:

• Assets
• Liabilities
• Equity
• Income
• Expenses

It’s the backbone of reliable bookkeeping and makes it easier to manage payroll accurately.

Why do you need to use charts of accounts?

A chart of accounts gives businesses a clear financial structure. Without it, transactions can quickly become disorganized, making it difficult to understand your cash position, track spending, or prepare financial reports. By organizing accounts into logical categories, businesses can spot trends and make informed financial decisions.

It’s also essential for meeting reporting and compliance requirements in the Philippines. A clear chart of accounts helps to keep your tax filings accurate and audits more efficient. Ultimately, it helps business owners and bookkeepers maintain consistent records and streamline their accounting processes.

How is the chart of accounts used?

A chart of accounts is used to record, classify, and summarize financial activity across the business. Each transaction is posted to a clearly defined account, allowing you to:

• Track cash flow more accurately
• Compare actual spending to forecasts
• Monitor business performance
• Prepare reports for internal and external stakeholders
• Maintain compliance with local financial standards

A well-organized chart of accounts with description fields also makes payroll-related accounting smoother. Payroll affects multiple parts of your financial records—from wages and taxes to employer contributions and payroll liabilities. A structured chart of accounts ensures that each component is tracked separately and accurately. It also becomes much easier to see how labor costs impact your overall financial position and to keep payroll data aligned with the rest of your accounts.

What’s included in the chart of accounts?

A chart of accounts groups transactions into categories such as assets, liabilities, equity, income, and expenses. These groupings help you organize financial data and prepare accurate reports. Here, we’ll break down each category and how they function within a chart of accounts structure.

Assets

Assets represent everything your business owns, controls, or uses to generate income. Within the chart of accounts, assets are usually listed first and separated into current assets (things you can convert into cash within a year) and non-current assets (long-term resources that support operations over time). Common examples include:

• Cash and bank accounts: The most liquid resources used for daily operations.
• Accounts receivable: Unpaid customer invoices that indicate future cash inflows.
• Inventory: Goods held for sale or production, essential for retail and manufacturing businesses.
• Equipment and property: Long-term physical assets like machinery, vehicles, or office space.

Tracking your business assets helps you understand your financial position, measure liquidity, and plan for future investments. It also provides a clear view of how your resources contribute to productivity, growth, and operational capacity.

Liabilities

Liabilities are the financial obligations your business owes to lenders, suppliers, employees, and government agencies. In the chart of accounts, they’re grouped into current liabilities (due within a year) and long-term liabilities (due over multiple years). These may include:

• Loans and credit facilities: Borrowed funds that require scheduled repayments.
• Accounts payable: Short-term debts owed to suppliers for goods or services.
• Taxes payable: Government obligations such as income tax, VAT, or withholding tax.
• Payroll liabilities: Employee-related obligations, including contributions and payroll taxes.

Organizing your liabilities properly helps you track payment deadlines and manage cash flow. It also makes audits and tax compliance much simpler.

Equity

Equity represents the owner’s or shareholders’ residual interest in the business after liabilities are subtracted from assets. It reflects the financial value that owners have invested or that the business has accumulated over time. Equity accounts may include:

• Owner’s capital: Initial and additional investments made by the business owner.
• Retained earnings: Profits the business keeps rather than distributing.
• Share capital: Funds raised through issuing shares to investors.

By tracking equity, businesses gain insight into long-term financial health, profitability trends, and how much value has been built over the years. Strong equity balances also support investor confidence and how much a bank may be willing to lend you.

Income

Income refers to the money your business earns from its normal operations, such as selling goods or providing services. In the chart of accounts, income accounts help you separate and analyze different revenue streams, including:

• Sales revenue: Earnings from products sold.
• Service income: Fees earned from performing services.
• Other operating income: Secondary revenue sources like commissions or rental income.

Having detailed income accounts allows you to identify which activities contribute most to your earnings and track performance fluctuations across seasons. This insight is important for pricing decisions, cash-flow forecasting, and strategic planning.

Expenses

Expenses represent the costs your business incurs to operate and generate income. In a chart of accounts, expense accounts help you monitor different types of spending, such as:

• Rent and utilities: Essential overhead costs for your business premises.
• Supplies and materials: Items used in daily operations or production.
• Payroll expenses: Wages, benefits, and related employee costs.
• Marketing and advertising: Activities that promote your products and services.

With categorized expenses, you can spot overspending, identify opportunities to cut costs, and determine whether expenses align with business goals. Clear expense tracking also improves budgeting accuracy and supports clean, reliable reporting.

How to create a chart of accounts

Structuring your chart of accounts correctly helps keep your financial data organized, readable, and aligned with local regulations. Here are the key steps to prepare a chart of accounts:

Step 1: Create account names 

Use clear, simple naming conventions that make each account instantly recognizable. Account names should describe the type of transaction, such as “Office Supplies” or “Service Revenue”. Using straightforward language reduces confusion, especially when several people handle bookkeeping.

Step 2: Assign numbers to account

Assigning numbers helps to keep your accounts in logical order. Many businesses use a numbering system where:

• 1000–1999 = Assets
• 2000–2999 = Liabilities
• 3000–3999 = Equity
• 4000–4999 = Income
• 5000–5999 = Expenses

Numbering your chart of accounts list makes it easier to locate accounts, automate reporting, and streamline audits.

Step 3: Organize accounts into categories

Group accounts into the five main categories—assets, liabilities, equity, income, and expenses. This structure keeps your chart of accounts readable and aligned with accounting principles.

Chart of accounts example

Below is a chart of accounts example to use as a reference when creating or refining your own chart:

Chart of accounts best practices

Following industry best practices helps you maintain a reliable and efficient chart of accounts. These guidelines make it easier to classify transactions correctly and ensure accuracy in your reports and accounting processes.

• Keep it organized and easy to read: Use consistent naming and numbering, and group accounts by category. A clean structure makes it easier for teams to collaborate.
• Consistent updates and consolidations: Review your chart of accounts regularly—at least annually—to make sure it stays relevant. Merge unused or duplicate accounts and update categories as your business evolves.
• Recordkeeping: Maintain well-organized supporting documents for every account. The chart of accounts should be kept for many years to support audits, tax filings, and long-term reporting accuracy.
• Follow accounting and financial guidelines: Make sure your chart of accounts meets both compliance and reporting requirements to avoid penalties.

Simplify your chart of accounts with Intuit QuickBooks

Setting up a chart of accounts is essential for managing every financial detail in your business—from tracking income and expenses to managing payroll. By organizing everything into clearly-named categories, you set the foundation for better decision-making and long-term financial health.

Intuit QuickBooks business tools simplify every step of building and maintaining your chart of accounts. Ready to streamline your accounting and save time? Try QuickBooks today and see how easy financial management can be.