Designing and maintaining the chart of accounts
Account types and why they matter, how deep to go, when to use a dimension instead of a new account, and how to change the chart safely once activity exists.
How-toFor Business owners, Bookkeepers, Firm staff
Account types drive everything
An account's type decides which statement it appears on, which side is its normal balance, and whether it closes to retained earnings at year end. Nothing else about the account matters as much.
| Type | Statement | Normal balance | Closes at year end |
|---|---|---|---|
| Asset | Balance Sheet | Debit | No |
| Liability | Balance Sheet | Credit | No |
| Equity | Balance Sheet | Credit | No |
| Revenue | Profit & Loss | Credit | Yes |
| Expense | Profit & Loss | Debit | Yes |
How detailed to go
The common mistake is building a chart with two hundred accounts because someone might one day want to see software spend split by tool. That produces a Profit & Loss nobody reads and a coding decision nobody makes consistently.
The better test: an account should exist if you would make a different decision based on its balance in isolation. If the answer is "I'd want to filter by that," you want a dimension, not an account.
| Question you want answered | Use |
|---|---|
| How much did we spend on rent? | An account |
| How much did the Portland office spend? | A location |
| How much did Marketing spend? | A class or department |
| How much did the Anderson project cost? | A project dimension |
| What is our gross margin? | Accounts, structured as revenue and cost of sales |
Numbering and ordering
Account numbers control the order accounts appear in statements and registers. A conventional block structure keeps reports readable and leaves room to insert accounts later without renumbering.
- 1000–1999 assets, ordered by liquidity: cash, receivables, inventory, prepaid, fixed assets.
- 2000–2999 liabilities, current before long-term.
- 3000–3999 equity, including retained earnings.
- 4000–4999 revenue.
- 5000–5999 cost of sales, kept separate from operating expense so gross margin is computable.
- 6000–6999 operating expense.
- 7000+ other income and expense, taxes, and anything below the operating line.
Changing the chart once activity exists
Renaming an account is safe — history follows the account, and the new name applies everywhere including historical reports. Changing an account's type after it carries activity is not safe, because every past statement that account appeared on silently changes shape.
To retire an account that has history:
- 1
Stop new activity by archiving it rather than deleting it.
Archived accounts no longer appear in pickers but keep their history and continue to appear in reports for periods where they carry a balance.
- 2
If it holds a balance that belongs elsewhere, post a reclassifying journal entry.
Date it in an open period. Do not back-date into closed periods to make old statements look tidier.
- 3
Note why, in the entry memo.
Six months from now the memo is the only thing that explains a reclass entry to whoever finds it.
Common questions
The chart is shared across the organization so consolidation is meaningful — code 6100 means the same thing in every entity. An account that is irrelevant to one entity simply carries no activity there and drops out of that entity's statements.
Control accounts are driven by their subledgers. Posting to A/R by hand breaks the tie-out between the control balance and the open invoice list, which then breaks aging reports. Post an invoice, a payment, or a credit memo instead.
See alsoCredit memos and receivable adjustmentsRecording a journal entry
Each bank or card account pairs one-to-one with an asset account in the chart. That pairing is what keeps the register and the ledger from drifting apart.
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