A small business chart of accounts needs about thirty accounts, not three hundred. Five or six for cash and cards. Then a handful for what you own and owe. One equity account per owner plus retained earnings. Three to five income lines, cost of sales if you have it, and fifteen or so expense accounts grouped the way you actually run the business. Everything else is detail that belongs in a vendor name or a class, not a new account.
This guide is for owners setting up QuickBooks Online or Xero for the first time, or cleaning up a chart that has grown to 200 lines nobody uses. You will get the thirty accounts, what each one is for, the five rules that keep the list short, and the handful of California and Los Angeles accounts that national templates leave out. It is the structure we set up for new clients at Books LA, and the one we move cleanup clients onto.
Why a short small business chart of accounts works better
Every account is a question you have to answer on every transaction. So thirty accounts means thirty clear choices. Three hundred means guessing, and guessing means the same expense lands in four places over a year. The reports then say nothing, because “Software” is split across Software, Subscriptions, Computer Expense, and Dues. A short chart makes coding fast and the profit and loss readable in one screen. It also makes the CPA’s job in January a transfer instead of a reconstruction. Detail you still want lives in the vendor name, the memo, or a class or tracking category, which the monthly reports can filter without a new account.
The 30 accounts
| Section | Accounts | Notes |
|---|---|---|
| Bank and cash (4 to 6) | Operating checking, savings or tax reserve, one account per credit card, payment processor clearing (Stripe, Square, PayPal) | One account per real-world account with a statement. Never two for the same card. |
| Other current assets (2 to 3) | Accounts receivable, Undeposited Funds, inventory if you carry it | Undeposited Funds should be zero at month-end; see our DIY bookkeeping checklist. |
| Fixed assets (2) | Equipment and furniture, accumulated depreciation | Purchases over your capitalization threshold go here; the CPA posts depreciation. |
| Liabilities (4 to 5) | Accounts payable, credit cards (as above), sales tax payable, payroll liabilities, loans payable (one per loan) | Sales tax and payroll taxes collected are liabilities, never income or expense. |
| Equity (3) | Owner contributions, owner draws or distributions, retained earnings | One pair per owner. Opening Balance Equity should be zero after setup. |
| Income (3 to 5) | Your main service or product lines, two to four of them, plus other income | Split by what you sell, not by customer. Refunds and discounts as contra lines if material. |
| Cost of sales (2 to 4) | Direct labor or subcontractors, materials or purchases, merchant fees | Only costs that scale with sales. Everything else is an expense below the line. |
| Expenses (12 to 15) | Advertising and marketing, bank fees, insurance, meals, office and supplies, professional fees, rent, repairs, software and subscriptions, taxes and licenses, travel, utilities and phone, wages, payroll taxes, vehicle | Fifteen is plenty. If a category has fewer than twelve transactions a year, it does not need its own account. |
Payroll deserves its own note. First, gross wages and the employer’s payroll taxes are expenses. The withheld amounts are liabilities that clear when the EDD and IRS deposits go out. Our California payroll taxes guide explains the four-part entry.
Five rules that keep the chart short
- One account per statement. If it has a statement, it is an account. If it does not, it is not. A second “Chase checking” account created during a bank feed reconnect is how duplicate books start.
- Vendors are not accounts. Adobe, Zoom, and QuickBooks all go to Software and subscriptions. The vendor report then tells you what each one cost.
- Twelve transactions a year, or no account. Below that, the category belongs inside a broader one instead. You can always split later; merging is harder.
- Classes and tracking categories carry the detail. Location, department, project, or city for the business license split. That is what they are for, and they keep the chart flat.
- Nothing named after a person or a question. “Ask my accountant,” “Misc,” and “Jelena’s card” are parking lots. By month-end they are empty or they are gone.
The California and Los Angeles accounts
National templates skip four accounts that a Los Angeles business needs. First, sales tax payable with the CDTFA as the agency, because collected tax is a liability and the return is filed from this balance. Our sales tax bookkeeping guide covers the setup. Second, payroll liabilities split enough to see the EDD side (SDI and PIT withheld) separately from federal. Third, taxes and licenses as its own expense, where the city business tax, Westside city certificates, and CDTFA fees land. Finally, if you operate in more than one city, a class per city, so the gross receipts figure each renewal asks for is a report rather than a reconstruction. The Westside business license guide explains why.
Setting it up, or cleaning it up
For a new file, build the thirty accounts before the first transaction and turn off the defaults you will not use. For an existing file, do not delete accounts. Instead, merge them. Both QuickBooks Online and Xero let you merge an account into another one, which moves the history and keeps the reports whole. Work from the profit and loss: every account with a tiny balance or a confusing name merges into the account it should have been. Then set the closing date so the cleanup stays done. The IRS recordkeeping guidance asks only that the records be complete and consistent, which a merged chart is. If the file has years of history in the wrong accounts, that is a cleanup project, and it is better priced than patched.
How Books LA handles this
Every new client starts on this chart, adapted to what they sell, and every cleanup ends on it. We add an account only when a category earns it. For the rest, we use classes. The result is a profit and loss that fits on one screen and a balance sheet the CPA can read without a call. Our Los Angeles bookkeeping services guide explains what else the monthly service includes.
Frequently asked questions
How many accounts should a small business chart of accounts have?
Around thirty for most service and retail businesses. A few bank and card accounts, the assets and liabilities you actually have, one equity pair per owner, three to five income lines, cost of sales where it applies, and twelve to fifteen expense accounts. More than fifty is a sign the detail belongs in vendors or classes.
Should I use the default chart in QuickBooks Online or Xero?
As a starting point only. The defaults include accounts most small businesses never use and miss the local ones they need. Deactivate what you will not use, then add sales tax payable and taxes and licenses. Keep the list to what you will code to every month.
What is the difference between cost of sales and expenses?
Cost of sales rises and falls with what you sell: subcontractors on a project, materials, merchant fees. Expenses are the cost of being open regardless: rent, software, insurance. The split gives you gross margin, which is the first number to watch on the profit and loss.
Where do owner draws go in the chart of accounts?
In equity, as owner draws or distributions, never in expenses. Owner contributions are the matching equity account. Keeping both out of the profit and loss is what makes the profit number mean something. It is also the first thing a CPA or lender checks.
Do I need a separate account for every credit card?
Yes, one per card that has its own statement, so each can be reconciled. Cards that share a statement share an account. In short, the test is always the statement.
Can I delete accounts I no longer use?
Merge rather than delete. Merging moves the history into the surviving account and also keeps prior-year reports intact. Deactivating is fine for an empty account, of course. Deleting an account with history is how reconciled balances stop matching.
Which California accounts does a national template miss?
Sales tax payable tied to the CDTFA, and payroll liabilities that show the EDD side separately. Also a taxes and licenses expense for the city business tax and local certificates, and a class per city for businesses that operate across Los Angeles and the Westside cities.
If your chart has grown past fifty lines and the reports stopped making sense, book a short call and we will map the merge with you.
This post is general information. Account structure for income tax purposes, capitalization thresholds, and depreciation belong with your CPA. Books LA provides bookkeeping services and does not advise on income tax.
