Chart of accounts, explained

An account is a named bucket for one kind of balance or activity: operating cash, accounts receivable, software expense, subscription revenue. The chart of accounts is the full list of those buckets in your bookkeeping system. Every transaction lands in at least two of them, one debited and one credited.

Accounts come in five types. Assets, liabilities and equity make up the balance sheet. Revenue and expenses make up the P&L.

Each account has a type, a name and usually a number. By convention the numbers group by type, with 1000s for assets, 2000s for liabilities and so on, which keeps the list in statement order. GAAP doesn't require any numbering scheme.

Detail that cuts across accounts, like department, product line or customer, belongs in classes or tags, which most systems support. One software expense account tagged by department is easier to report on than twelve separate software accounts.

A young startup can run on a chart that fits on one page. It keeps two hosting accounts, one under cost of revenue for the production app and one under operating expenses for internal tools, so gross margin comes out right. Payroll is one account tagged by department, so R&D and sales show separately.

Two years later an investor asks for gross margin by product. Cost of revenue is already separated and products are tagged, so the answer is a report filter. Without that, it would be a project to re-code two years of transactions.

The P&L and balance sheet are printed straight from the chart, so its structure decides what those statements can show. Changing it mid-year breaks month-to-month comparisons, which is why it's cheapest to settle before the first few closes.