QuickBooks and Xero ship with a default chart of a hundred-odd accounts, and most owners either use them as they are (so "Office expenses" holds the whole business) or add an account every time something new appears (so there are four kinds of software subscription and nobody remembers which is which). Both produce a profit and loss that cannot answer the questions the owner asks.
Principles
- Every account exists because someone will make a decision from it. If nobody would act differently on the number, merge it.
- Forty to sixty accounts is typical for a small business. More than a hundred is a sign the chart is doing the job of a tracking category.
- Consistency beats precision. A slightly wrong account applied the same way every month gives a usable trend; the "right" account chosen differently each time gives noise.
- The structure should match how the business is managed, not how the tax return is laid out. The return is a mapping exercise done once a year.
Numbering
Optional in both platforms, worth switching on. The convention: 1000s assets, 2000s liabilities, 3000s equity, 4000s revenue, 5000s cost of sales, 6000s operating expenses, 7000s other income and expense, 8000s taxes. Leave gaps of ten so accounts can be inserted in order later.
Revenue and cost of sales
This is where the chart earns its keep. Revenue split by what the business sells (product lines, service types, or channels), with a contra account for refunds and discounts so gross and net are both visible. Cost of sales limited to costs that scale directly with revenue: product cost, freight in, payment processing, fulfilment, direct contractor cost, hosting for a SaaS. The gross margin that results is the number most owners have never seen accurately.
Operating expenses
Grouped, not itemised. Payroll and contractors (by function if useful: sales, delivery, admin), marketing (advertising, tools, content), software and subscriptions (one account, with the vendor on each transaction), rent and facilities, professional fees, insurance, travel, bank charges, general office. Twelve to twenty accounts. The question "how much do we spend on software" is answered by the account; "which software" by the vendor list under it.
Balance sheet accounts that small businesses miss
- Clearing accounts for each payment platform (Stripe clearing, Shopify clearing) so payouts reconcile.
- Sales tax payable, separate from income tax.
- Payroll liabilities split between taxes withheld and employer taxes.
- Deferred revenue for anything paid upfront.
- Owner contributions, owner draws, and (for foreign-owned LLCs) a related-party loan account, so Form 5472 is a report rather than a reconstruction.
- Inventory as an asset, not an expense, for anyone holding stock.
Classes and tracking categories
For anything you want to see across all accounts (location, department, product line, client), use QuickBooks classes or Xero tracking categories rather than multiplying accounts. One dimension is manageable; two is the sensible maximum; more is a sign the business needs a reporting layer.
Templates we start from
Services and agencies: revenue by service line, direct contractor cost in cost of sales, payroll by function. SaaS: subscription and services revenue separated, hosting and payment fees in cost of sales, deferred revenue, capitalised development if material. E-commerce: revenue by channel, refunds and discounts contra, COGS with landed cost, fulfilment and platform fees separate, inventory and clearing accounts per platform. Each is adjusted on the onboarding call and then left alone.
Changing an existing chart
Merge rather than delete, so history follows. Rename for clarity. Make the change at a month-end and re-run the prior months' reports to check nothing broke. Do not re-categorise history beyond the current year unless a lender or investor needs it; the trend from now on is what matters.
The check: open last month's profit and loss. Can you see the gross margin, and does the largest expense line have a name that tells you what it is? If either answer is no, the chart needs work.