What a Chart of Accounts Is, and How to Choose One

A chart of accounts is the full list of "buckets" your money can sit in or move through — every bank account, every credit card, every category of income and expense, and the equity that represents what's actually yours. Every journal entry posts into two or more of these buckets. Without a chart of accounts, "categorizing a transaction" wouldn't mean anything, because there'd be nothing to categorize it into.

Every account belongs to exactly one of five types: asset (things you have — cash, a bank balance, equipment), liability (things you owe — a credit card balance, a loan), equity (what's actually yours after subtracting what you owe), income (money you've earned), and expense (money you've spent). This five-way split isn't arbitrary — it's the same split that determines whether an account grows with a debit or a credit, and it's what makes reports like a balance sheet or P&L possible to build at all.

Accounts are usually grouped into numbered blocks so related ones sort together — assets in the 1000s, liabilities in the 2000s, equity in the 3000s, income in the 4000s, and expenses in the 5000s and 6000s. BalanceMCP's own starter business chart follows this: 1000 Cash, 1010 Checking, 1200 Accounts Receivable, 2000 Accounts Payable, 2100 Credit Card, 3000 Owner's Equity, 4000 Sales, 6300 Rent, 6400 Software & Subscriptions, and so on. The number itself carries no meaning beyond sorting and grouping — 6300 isn't inherently more important than 6900.

Which starting chart makes sense depends on what you're actually tracking money for. BalanceMCP ships two templates: a Schedule-C-friendly business chart with accounts like Cost of Goods Sold, Subcontractors, and Payroll Liabilities that a household has no use for, and a simpler personal chart with categories like Groceries, Dining, and Housing that a business has no use for either. Pick the one that matches what you're actually running, and treat it as a starting point rather than a finished product.

The temptation with a chart of accounts is to invent a new, more specific account every time you're not sure where something goes — a separate line for every vendor, every kind of software, every one-off purchase. Resist it. Every additional account is one more decision you (or your assistant) has to get right, correctly, every single time you categorize something, and most of that specificity buys you nothing you'll ever look at. Add an account when you have a real reason to see that number on its own — a tax category your accountant asks for, a cost you're actually watching closely — not by default.

Concretely, deciding what belongs on your chart looks like this: if you're running a small remodeling business off the business template, you might add one account — say, 6120 Equipment Rental — because you rent specialized tools often enough to want that spending visible on its own, separate from general Supplies. You would not add a separate account for every rental company you use; the account represents the kind of spending, not the vendor, and each transaction's memo already records who the money went to without needing a dedicated account per vendor.

Each bank account or credit card you connect gets its own dedicated account in the chart rather than sharing one generic "Bank" bucket — a checking account might land at 1011, a savings account at 1012, allocated as child codes under the parent block. This is what keeps a transfer between two of your own accounts visible in your books as an actual movement of money, rather than disappearing into a single undifferentiated cash bucket.

Accounts aren't deleted once they've been used, because the journal that posted against them is append-only — old entries need somewhere permanent to point. Instead, an account you no longer use gets archived, which closes it to new activity while leaving its history intact, and it can be unarchived later if you decide you need it again after all.

One detail worth knowing about the numbered child accounts a bank block allocates: an archived bank account still occupies its code as far as the chart is concerned, since the journal that posted against it needs that code to keep meaning something. If a block runs out of free codes, a brand-new bank account of that type can't be created until the block is expanded — a rare, edge-case limitation, but worth knowing about if you ever connect an unusually large number of accounts of one kind.