Chart of accounts questions for small businesses

Chart of accounts questions start with a simple test: what will someone need to know separately? Every line says someone will one day want that answer. So the way to maintain the list is not to tidy it, but to answer the questions that keep coming up when a transaction does not obviously fit.

Below are the ones that actually recur, with the reasoning rather than a ruling, because the right answer for your business depends on what you need to be able to see.

What to take away

Before adding anything, ask what you would do differently depending on what ended up in it. No answer means no account.
Most of the awkward cases are not new accounts at allthey are dimensions, definitions, or balance sheet items in disguise.
Never delete an account with history. Stop it taking new entries and leave the past readable.

Should this be an account at all?

A new supplier has appeared. Does it need an account?

Should this be an account?

New supplier selling what you already buy?

Yes

Use the existing account

Continue to next test

We spend a lot on one thing. Does size justify a split?

Size is a weak reason on its own. The test is whether you would act. A large cost you have no lever over can sit inside a group; a smaller one you actively renegotiate every year deserves its own line so you can see whether the negotiation worked.

Somebody asked for this figure once. Should I create the line?

Ask whether they will ask again on a cycle. A one-off request is better answered from the ledger with a filter than by adding a permanent coding decision that recurs every week for a question asked once.

This is a one-off project. Where does it go?

In the existing accounts, with a project dimension or a consistent description. A project is a who and a which, not a what, and projects end while accounts do not.

Should the chart mirror the boxes on a tax return?

Making the two agree feels efficient and reliably produces a chart that answers the annual question well and every monthly question badly. Design for the reports you read, then map to the filing your business uses. For a sole proprietor filing Schedule C, check the IRS instructions for Schedule C and the IRS Tax Guide for Small Business; other business structures use different returns. Confirm which amounts your filing requires you to identify separately before changing the chart.

Where do the awkward things go?

A deposit we paid to a supplier before anything arrived.

Where awkward items belong

Item

Supplier deposit: Asset
Money held for others: Liability
Staff advance: Receivable
Discounts and returns: Reduce revenue
Bank charges and interest: Two separate things

Correct treatment

Supplier deposit: Cost when delivered
Money held for others: Not income
Staff advance: Cleared when repaid
Discounts and returns: Own accounts
Bank charges and interest: Separate accounts

Money we hold that belongs to someone else. A liability. Customer deposits, amounts collected on behalf of an authority, funds held for a client. None of it is income and none of it is yours, even while it is in your account. Keep each kind in its own liability account so the balance can be checked against what you actually owe.

An advance to a member of staff. A receivable until it is repaid or cleared against a claim, not a wage cost on the day it was paid.

Discounts we give, and goods customers send back. These reduce what you earned rather than adding to what you spent, which is why revenue recording treats them as their own documents. Holding them in their own accounts alongside revenue, rather than netting them into the sales figure, is what lets you see whether your list price is real. Whether they appear net or gross on the face of a statement is a presentation choice; keeping the underlying accounts separate preserves the option.

Bank charges and interest. Two different things, and worth separating. Charges are a cost of running the account. Interest describes the financing of the business rather than its trading, and belongs below the operating result so that the operating result stays comparable across periods when borrowing changes.

Something that could reasonably go in either of two accounts. Pick one, write a sentence in your definitions saying which wins and why, and apply it every time afterwards. Consistency is worth more than being theoretically right, because an inconsistently coded line makes every comparison across periods meaningless. What consistent coding is worth is visible in the measurements you can take on an account list.

Questions about changing what already exists

Two accounts clearly overlap. Merge them or define them?

Changing existing accounts safely

Define overlapping accounts before merging
Never delete a posted-to account; make it inactive
Move closing balances with a dated journal
Restructure at a period boundary, not mid-month
Write the old-to-new mapping before touching anything
Note any discontinuity where the next person will find it

Can I delete an account?

Not one that has ever been posted to. Deleting either destroys the history or silently relocates it, and both are worse than a longer list. Make it inactive so it accepts nothing new, and leave the past intact.

What do I do with a balance in an account I want to close?

Move it deliberately with a dated journal that says where it went and why, then close the account. A balance that vanishes without an entry explaining it is exactly the kind of thing that makes a set of books untrustworthy.

When in the year should I restructure?

At a period boundary, ideally the start of a year, and never in the middle of a month. Write the mapping from every old account to its new home before you touch anything, then decide whether prior periods will be restated using it. For U.S. GAAP, consult the Financial Accounting Standards Board's Accounting Standards Codification guidance on Accounting Changes and Error Corrections before deciding whether prior periods should be restated. If they will not be, note the discontinuity where the next person will find it.

How do I set the opening balances for a brand new set of books?

From the last set of accounts prepared for the previous period, not from the bank balance, and from the underlying records described in the IRS guide Starting a Business and Keeping Records. Every asset, liability and equity balance carries forward. Which figures are the correct starting point, and whether any adjustment is needed, is a question for whoever prepared the previous accounts.

Do I need separate accounts per currency?

For the accounts that hold currency, usually yes, because each has to be reconcilable to its own outside record. For income and expense lines, no: those record the value in your reporting currency. How differences on translation are handled is a rules question rather than a structural one. For U.S. GAAP, the Financial Accounting Standards Board's Accounting Standards Codification guidance on Foreign Currency Matters addresses that subject; confirm the accounting basis your business uses.

Questions about who decides

Who is allowed to create an account?

Who decides and what to do

One named person creates accounts
Short request with definition attached
Nothing fits: use the holding account
Attach the document and write the question
Add a name and a date against it
Clear it before month end
Chart owner owns the definitions

What should someone do when nothing fits?

Use the holding account, attach the document, and write the question down with a name and a date against it. Parking is legitimate. Leaving it parked past the month end is not, because by then nobody remembers what it was.

Who owns the definitions?

Whoever owns the chart. The definitions are not documentation of the chart, they are the chart; the numbered list is just the index. Keep those definitions with the ledger and its supporting records; see bookkeeping foundations and tools for related setup guidance.

Common questions

Is there a right number of accounts?

No. The workable test is a report you can read on one screen with no line you skip and no line you have to open the ledger to understand.

What if my system will not let me do something described here?

Then you have a constraint to work around rather than a principle to abandon. Write down what you did instead and why, so the next person does not read the workaround as a decision.

How often should the chart be reviewed?

Once a year, alongside a look at last year's report, and immediately whenever a genuinely new activity starts. Between those, changes should be rare and deliberate.

Should sub-accounts be used heavily?

Use them where a group genuinely has members you read together and occasionally apart. Beyond two levels they mostly add scrolling and make the coding decision harder rather than easier. The type rules and numbering that hold all of it together are in the chart of accounts overview.