QuickBooks Chart of Accounts: Setting it up the Right Way

If your chart of accounts (COA) is messy, everything downstream is messy — reports, tax prep, job costing, even cash flow. QuickBooks will happily let you create 200+ random accounts, but that doesn’t mean you should.

Here’s a clean, accountant-approved way to set up your COA in QuickBooks so it’s:

• easy to read
• easy to code transactions to
• useful for taxes
• and actually helpful for management decisions

I’ll walk through structure first, then naming standards, then what to avoid, and I’ll give you a sample layout at the end.

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1. What the Chart of Accounts Actually Does

Think of the COA as the filing cabinet for your money. Every transaction you record in QuickBooks needs a “folder” to live in. If your folders are too vague (“Misc expense”), too specific (“Coffee at Starbucks on 10/4”), or duplicated (“Fuel”, “Gas”, “Auto Fuel”), your P&L becomes useless.

A good COA should:

1. Match how you run the business (not some random template).
2. Map easily to your tax return.
3. Be simple enough that you and your bookkeeper will actually use it consistently.

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2. Start With the Right Structure

QuickBooks already groups accounts for you. Build inside these sections:

1. Assets
   • Bank accounts
   • Accounts receivable
   • Prepaid/Deposits
   • Fixed assets
2. Liabilities
   • Credit cards
   • Lines of credit / loans
   • Payroll liabilities
   • Sales tax payable
3. Equity
   • Owner’s equity / member’s equity
   • Owner draws / distributions
   • Retained earnings (system)
4. Income
   • Your main revenue streams
   • Other income
5. Cost of Goods Sold (COGS)
   • Direct costs tied to revenue
6. Expenses (Operating)
   • Overhead and admin
   • Selling/marketing
   • Office, software, subscriptions, etc.

Don’t fight this structure — use it.

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3. Design for Reporting: Start at the Top (Income → COGS → Expenses)

A clean P&L should tell the story quickly:

1. Income – what you earned
2. Cost of Goods Sold – what it cost you to earn it
3. Gross Profit
4. Operating Expenses – what it costs to keep the lights on
5. Net Income

If you mix costs in the wrong area — for example, putting direct labor down in operating expenses — your gross profit % will look wrong, and you’ll make bad pricing decisions.

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4. Income: Keep It Focused

Create income accounts based on how you sell, not on who paid you.

Good examples:

• Sales – Services
• Sales – Products
• Project/Job Income
• Consulting/Advisory Income
• Retainer/Monthly Recurring Income

Not good:

• “Zelle Income”
• “Stripe Income”
• “Square Income”

(Zelle/Stripe/Square are payment methods, not kinds of income. Use them in bank rules or customer/payment setup, not as income accounts.)

If you have multiple service lines (ex: bookkeeping, tax, payroll, cleanups), then breaking revenue out by service is smart because it tells you what’s actually profitable.

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5. Cost of Goods Sold (COGS): Only Direct Costs Here

COGS = costs that would not exist if you didn’t do the work or make the sale.

Examples:

• Subcontractors
• Direct labor (job-related)
• Materials
• Merchant processing fees (arguably)
• Shipping/Freight to customers
• Inventory purchases

If you’re in construction, you can go one level deeper:

• COGS – Materials
• COGS – Subcontractors
• COGS – Equipment Rental
• COGS – Permits/Plans

If you’re not tracking job costing yet, at least get the direct vs overhead split right now — you can refine later.

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6. Operating Expenses: Group by Function

This is where people get messy. Don’t create 50 random expense accounts. Group them.

Admin & Overhead

• Payroll – Admin/Office
• Payroll Taxes – Admin
• Rent
• Utilities
• Office Supplies
• Software & Subscriptions
• Dues & Subscriptions
• Insurance – General Liability
• Insurance – Workers Comp (if not job-specific)
• Telephone & Internet

Sales & Marketing

• Advertising & Marketing
• Meals (Client/Business)
• Travel
• Website/Hosting

Professional

• Accounting & Tax
• Legal & Professional Fees
• Education/CPE

If you stay at this level, your P&L will be readable. If you need more detail, use classes, locations, or items — don’t blow up the COA.

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7. Assets & Liabilities: Name Them Like You’ll Reconcile Them

This is where accountants cry.

Bank accounts – name with bank + last 4:

• Chase Checking (9292)
• Amex Business Platinum (3004)
• Citi Card (2589)

Loans – name with lender + last 4:

• Chase LOC (1234)
• Ford F-150 Auto Loan (4321)

Sales Tax Payable – use one account per jurisdiction if you have multiple states, or keep one if you file in one state.

Payroll Liabilities – don’t post random stuff here. Let payroll integrate or make clean JE’s monthly.

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8. Equity: Keep Owner Activity Clean

For S-corps, partnerships, and single-member LLCs, you want to separate:

• Owner/Shareholder Distributions
• Owner Contributions
• Owner Reimbursements (if paid personally)
• Retained Earnings (QuickBooks controls this)

Why? Because at year-end, you (or your CPA) need to know:

• how much you actually took out
• how much you put in
• what basis/distribution looks like
• and whether anything should have been payroll

So instead of using “Owner’s Draw” for everything, do this:

• Owner Contribution – David
• Owner Distribution – David
• Shareholder Reimbursements

If multiple owners: create separate subaccounts per owner.

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9. Naming Standards (Super Important)

Here’s how to name accounts so you don’t end up with duplicates:

1. Use a category word first, then detail.
   • “Insurance – General Liability”
   • “Insurance – Workers Comp”
   • “Insurance – Auto/Trucks”
2. Avoid slang or vendor names:
   • Bad: “Gusto”, “Monday.com”, “Chick-fil-A”
   • Better: “Payroll Processing Fees”, “Software & Subscriptions”, “Meals – Business”
3. Use subaccounts only when you’ll actually report on them.
   • Software & Subscriptions
     • QuickBooks Online
     • Monday.com
     • Box
     • Adobe If you’ll never filter by the subaccount, don’t create it.

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10. What NOT to Do

• ❌ Don’t create an expense account every time you see a new vendor.
• ❌ Don’t post loan payments straight to expense — split principal vs interest.
• ❌ Don’t use “Ask My Accountant” forever. Clear it monthly.
• ❌ Don’t record owner personal spending to random expense accounts — push to Owner Distribution.
• ❌ Don’t let QuickBooks auto-create 15 “Sales of Product Income” accounts because of imports.

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11. Use Classes/Locations Instead of More Accounts

If you want to track:

• by property
• by truck
• by crew
• by location (Carlsbad, Fresno, Cardiff)
• by line of business

…use Classes or Locations in QuickBooks, not 40 new income accounts.

Chart of Accounts = what it is

Class/Location = where/who it belongs to

Item/Project = which job/customer it’s tied to

When you mix those together in the COA, reports get ugly.

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12. Sample QuickBooks Chart of Accounts (Short Version)

Assets

• 1000 · Checking – Chase (9292)
• 1010 · Savings
• 1100 · Accounts Receivable
• 1200 · Prepaid Expenses
• 1500 · Furniture & Equipment
• 1590 · Accumulated Depreciation

Liabilities

• 2000 · Accounts Payable
• 2100 · Credit Card – Amex (3004)
• 2200 · Sales Tax Payable
• 2300 · Payroll Liabilities
• 2400 · Loan – Ford F-150

Equity

• 3000 · Owner Capital
• 3100 · Owner Contribution – David
• 3200 · Owner Distribution – David
• 3900 · Retained Earnings

Income

• 4000 · Service Income
• 4010 · Cleanup/Backwork Income
• 4020 · Consulting/Advisory
• 4900 · Other Income

Cost of Goods Sold

• 5000 · Materials & Supplies
• 5100 · Subcontractors
• 5200 · Direct Labor
• 5300 · Merchant/Processing Fees

Expenses

• 6000 · Payroll – Admin
• 6100 · Payroll Taxes – Admin
• 6200 · Rent
• 6300 · Utilities
• 6350 · Software & Subscriptions
• 6400 · Advertising & Marketing
• 6500 · Meals – Business
• 6600 · Insurance
• 6700 · Accounting & Professional Fees
• 6999 · Ask My Accountant (clear monthly)

That’s clean. That’s readable. That will tie to tax.

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13. Final Cleanup Routine (Monthly)

To keep the COA “right,” do this every month:

1. Run Account List report – look for duplicates or new accounts QB created.
2. Merge obvious duplicates (“Fuel” and “Auto Fuel”).
3. Reclass weird vendor-based accounts back to real categories.
4. Clear “Ask My Accountant.”
5. Review equity postings for personal vs business.

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14. If You’re Migrating From a Messy File…

• Deactivate (make inactive) accounts you don’t want to use.
• Rename accounts so users pick the right one.
• Build bank rules so the same expense always goes to the same account.
• Document the chart in a 1-page SOP so staff don’t improvise.