What chart of accounts should a startup use?

01Number ranges#

US GAAP does not prescribe account numbers. The common convention, and the one accountants expect, groups accounts by statement and type:

Leave gaps. Number in steps of ten so a new account can slot in beside its siblings without renumbering. Number the accounts within each range in the order they appear on the statements, so the trial balance reads top to bottom like the balance sheet and income statement.

• 1000–1999 Assets: cash, receivables, prepaids, equipment, deposits.
• 2000–2999 Liabilities: payables, credit cards, accruals, payroll liabilities, deferred revenue, SAFEs, loans.
• 3000–3999 Equity: common stock, preferred stock, additional paid-in capital, retained earnings or accumulated deficit.
• 4000–4999 Revenue: subscriptions, services, refunds and discounts as contra-revenue.
• 5000–5999 Cost of revenue: hosting, payment processing, support, third-party software in the product.
• 6000–6999 Operating expenses: payroll, software, rent, marketing, contractors, professional fees.
• 7000–7999 Other income and expense: interest, foreign exchange, fair value changes. Income taxes at the end.

02The balance-sheet accounts a startup needs#

One cash account per bank account, so each reconciles to its own statement; a clearing account for Stripe or another processor; accounts receivable; prepaid expenses; fixed assets with their accumulated depreciation as a separate contra account; and security deposits on leases.

On the liability side: accounts payable, one account per credit card, accrued expenses, accrued payroll, payroll tax liabilities split into what was withheld from employees and what the employer owes, sales tax payable, deferred revenue, and the SAFE or convertible note liability with one sub-account per instrument or per round. Equity needs common stock, preferred stock by series once you have a priced round, additional paid-in capital, and retained earnings. Every one of these should be reconcilable to a source outside the books.

03The expense accounts that matter#

Payroll is the largest line in almost every startup, followed by software, marketing, rent and contractors. A useful starting set for operating expenses:

Resist accounts named Miscellaneous or General expense. Anything that lands there will have to be reclassified before anyone can use the numbers, and a reviewer reads a large miscellaneous balance as a sign nobody looked.

• Payroll: wages and salaries, payroll taxes, benefits, and 401(k) match as separate accounts.
• Contractors: kept apart from employees, and engineering contractors apart from others.
• Software and subscriptions: tools the team uses. Software that runs inside the product goes in cost of revenue.
• Hosting and infrastructure: usually cost of revenue for a SaaS company, with development environments in R&D if you can separate them.
• Rent and office: lease cost, coworking, utilities.
• Marketing and advertising: paid acquisition separate from events, content and agencies.
• Professional fees: legal, accounting, tax, recruiting.
• Travel and meals: separate accounts, because tax treats them differently.
• Insurance, bank fees, payment processing fees, and taxes and licenses.

04Accounts versus classes and tags#

Accounts answer “what kind of cost is this?” Classes and tags answer “which part of the business is it for?” QuickBooks Online uses classes and locations, on the plans that include them; Xero uses tracking categories, up to two active at a time. Both let you slice the same account by a second dimension without multiplying accounts.

The common choice for a startup is to keep one set of expense accounts and tag every transaction with a department: research and development, sales and marketing, general and administrative, and cost of revenue where it applies. An engineer’s $15,000 monthly salary goes to Wages and salaries, class R&D; an account executive’s $12,000 goes to the same account, class Sales and marketing. One account, two departments, and a functional income statement comes straight out of the report.

Add a new account instead when the item needs to stand on its own on the financial statements or be reconciled on its own: a new bank account, a new loan, a new revenue stream your investors will want reported separately.

05Why categories decide your burn#

Burn is computed from the income statement and the cash flow statement, and both are built from the chart. If contractors, software and payroll share accounts, nobody can say whether burn rose because of a hire, a tool or a vendor. If hosting sits in operating expenses one month and cost of revenue the next, gross margin moves for no reason.

A clean chart lets a founder answer the three questions every board asks about spending: what changed, why, and is it recurring. Each answer is a line on the report rather than an afternoon in a spreadsheet.

06Why categories matter for the R&D credit#

The federal research credit under Section 41 is built from three kinds of qualified cost: wages for people doing qualified research, supplies used in it, and 65% of what you pay contractors to do it in the US. Your tax preparer also needs research and experimental costs identified for the deduction rules that sit beside the credit. None of that can be pulled from a ledger where engineers and salespeople share one payroll account and every contractor shares another.

Tag payroll by department, keep US engineering contractors in their own account, and separate cloud costs used for development from production hosting if you can. The credit still needs a study of who did what, but the books will already hold most of the numbers.

07Changing the chart without breaking history#

Charts grow. When they do, change them in a way that leaves prior months intact:

• Inactivate accounts you no longer use; do not delete them.
• Move a balance between accounts with a dated journal entry, not by merging accounts.
• Rename only if the meaning is unchanged.
• Write the mapping down when you restructure, so prior reports can be compared to new ones.
• Make changes at the start of a month or a year, never in the middle of a closed period.