Bookkeeping Basics: Understanding Your Chart of Accounts

If you've ever felt overwhelmed by your business finances or thought "bookkeeping just isn't for me," I want you to stop right there.

Here's the truth: bookkeeping isn't as complicated as you think. And understanding the basics can completely transform how you manage your business.

Let’s start off with the most foundational piece of your bookkeeping, your Chart of Accounts.

What Is a Chart of Accounts (COA)?

Your Chart of Accounts is the basic structure that tracks all of your business activity. Think of it as the backbone of your financial system. Every transaction, every dollar in and out of your business, gets categorized into one of these accounts.

And here's the good news: it's built on just five main categories. That's it.

The 5 Main Account Types in Your Chart of Accounts:

1. Assets (Account Numbers Starting with 1)

Assets are the things of value in your business.

These can include:

• Cash in your bank account
• Equipment or inventory
• Accounts receivable (money owed to you)

Why it matters: Assets show what your business owns and what gives it financial strength.

2. Liabilities (Account Numbers Starting with 2)

Liabilities are the things you owe.

These can include:

• Business loans
• Credit card balances
• Accounts payable (money you owe to vendors)

Why it matters: Liabilities show your business's financial obligations and what needs to be paid.

3. Equity (Account Numbers Starting with 3)

Equity represents the shareholder's stake in the company—basically, what's left over after you subtract liabilities from assets.

This can include:

• Owner's equity
• Retained earnings
• Draws or distributions

Why it matters: Equity shows the true value of ownership in your business.

4. Income/Revenue (Account Numbers Starting with 4)

Income (also called revenue) is the money your business earns from sales of goods or services.

This can include:

• Service fees
• Product sales
• Membership income

Why it matters: Income is what keeps your business running and growing.

5. Expenses (Account Numbers Starting with 5, 6, 7, 8, or 9)

Expenses are the money you spend to run your business.

This can include:

• Rent or office expenses
• Software subscriptions
• Contractor payments
• Marketing costs

Why it matters: Tracking expenses helps you understand profitability and manage your budget.

Why Understanding Your Chart of Accounts Matters

When you understand how your Chart of Accounts is structured, you can:

✅ Make better financial decisions based on real data

✅ Communicate clearly with your bookkeeper or accountant (no more feeling lost in the jargon!)

✅ Understand your financial reports like your Profit & Loss statement and Balance Sheet

✅ Catch errors or inconsistencies in your books before they become problems

This isn't just about "doing your books"—it's about empowering yourself to run your business with confidence and clarity.

If you've been telling yourself, "I'm just not good with numbers" or "bookkeeping is too hard for me," I want to challenge that narrative.

You're more capable than you think. And once you understand the basics, everything else starts to make sense.

 Here's to taking control of your finances!