How chart of accounts works
Each account in the chart of accounts has a name and usually a number, like 1000 for cash or 4000 for sales revenue, so every transaction has a specific place to be recorded. A well-built chart of accounts groups similar accounts together and avoids duplicates, which makes reports easier to read and compare over time. Numbering ranges are typically grouped by type, so all asset accounts share one range and all expense accounts share another.
The chart of accounts is set up when a business first starts using accounting software and is updated as the business grows or its reporting needs change. Adding too many accounts makes reports cluttered, while too few hides useful detail. Most small businesses do best with a chart of accounts that mirrors how they actually think about their income and expenses. A chart of accounts that is too generic can also make it hard to see which parts of the business are actually profitable.
Example
A retail store's chart of accounts includes account 4000, Sales revenue, and account 5000, Cost of goods sold. When it sells $3,000 worth of merchandise that cost $1,800 to buy, the $3,000 posts to account 4000 and the $1,800 posts to account 5000. The gross profit of $1,200 can then be pulled straight from those two accounts.
Chart of accounts in QuickBooks Online vs Xero
QuickBooks Online sets up a default chart of accounts based on your business type, which you can edit under the Chart of accounts settings. Xero offers a similar default list under its Chart of accounts screen and allows bulk import from a spreadsheet. Both let you add, merge, or archive accounts as the business changes. Both platforms warn you before deleting an account that already has transactions posted to it, to prevent accidental data loss.
Related terms
How LedgerBPO handles chart of accounts
We build or clean up your chart of accounts so it matches how your business actually operates, then keep new transactions coded to the right accounts every month. A dedicated accountant reviews the structure during onboarding and adjusts it as you grow. You get reports that are easy to read and compare over time. We also merge duplicate or unused accounts over time so the chart of accounts stays clean and easy to work with.