Last reviewed October 7, 2026 · By the NYBACS advisory team
Short answer
A chart of accounts is the numbered list of every category a company uses to record transactions, grouped into assets, liabilities, equity, revenue and expenses. For a US startup, a good one is short enough to apply consistently, maps cleanly to the lines of the US tax return, and separates the items investors and reviewers ask about — cost of revenue, deferred revenue, owner funding and balances with related companies.
Key takeaways
- Accounts are grouped into five types and usually numbered in ranges, for example 1000s assets, 2000s liabilities, 3000s equity, 4000s revenue and 5000s onward for costs and expenses.
- Equity accounts differ by entity type: an LLC uses member contributions, distributions and accumulated equity; a C-Corp uses common stock, additional paid-in capital and retained earnings.
- Cost of revenue — hosting, payment fees, fulfillment, direct support — should sit apart from operating expenses so gross margin can be measured.
- Foreign-owned companies need dedicated accounts for balances with the owner or parent so related-party reporting can be traced.
- Use classes, tags or departments for dimensions such as product line or location instead of creating ever more accounts.
The five account types and a simple numbering scheme
Every transaction hits at least two accounts, and every account belongs to one of five types. Numbering them in ranges keeps the list readable and lets reports group automatically.
| Range | Type | Startup examples |
|---|---|---|
| 1000–1999 | Assets | Operating bank, processor clearing, accounts receivable, prepaid expenses, equipment |
| 2000–2999 | Liabilities | Credit cards, accounts payable, accrued expenses, deferred revenue, sales tax payable, SAFE or note liabilities |
| 3000–3999 | Equity | Member contributions and distributions, or common stock, APIC and retained earnings |
| 4000–4999 | Revenue | Subscription revenue, services revenue, product sales, refunds and discounts |
| 5000–5999 | Cost of revenue | Hosting, payment processing fees, fulfillment, direct support staff |
| 6000–7999 | Operating expenses | Salaries, contractors, software, marketing, rent, professional fees |
| 8000–8999 | Other income and expense | Interest, foreign exchange gains and losses |
Leave gaps between numbers so new accounts can be inserted in the right place later.
Accounts a foreign-owned startup should not skip
Default templates in accounting software are built for domestic small businesses and miss accounts a cross-border company needs:
- Due to / due from parent or affiliates — one pair per related company, so intercompany balances can be agreed each month.
- Loan from member or shareholder — kept separate from contributions so debt and equity are never blended.
- Payment processor clearing accounts — one per platform, holding gross sales until payout.
- Deferred revenue — for annual subscriptions and upfront payments not yet earned.
- Foreign exchange gain or loss — for multi-currency balances and foreign invoices.
- Contractors, US and non-US — split, because research cost treatment differs depending on where the work is done.
These accounts cost nothing to add at setup and save hours of analysis at tax time or during an investor review.
Designing for the tax return, gross margin and investors
A practical test of a chart of accounts is whether each expense account maps to one line on the company's federal return. Form 1120, for example, separates compensation of officers from other salaries and wages, and lists taxes and licenses, interest, advertising, repairs and rents on their own lines. Corporations with total receipts of $500,000 or more report officer compensation detail on Form 1125-E, so officer pay should be identifiable in the books.
The same discipline serves investors. If payment fees and hosting are buried in operating expenses, the gross margin looks better than it is and will be restated in diligence. Decide once which costs are cost of revenue, document the rule, and apply it every month.
Accounts versus classes: keeping the list short
A common error is creating an account for every customer, vendor, project or country. That detail belongs in sub-ledgers and tracking fields, not in the chart of accounts. Customer balances live in the receivables sub-ledger; vendor balances in payables; product lines and locations in classes or tags.
Consider a US company selling both software subscriptions and implementation services in the US and Canada. Rather than four revenue accounts per country, it can use two revenue accounts — subscriptions and services — and a location tag. Reports by product, by country or by both still come out of the system, but a bookkeeper choosing where to post an invoice has two sensible options instead of eight. The same logic applies to marketing: one advertising account tagged by channel is easier to keep consistent than a separate account for every ad platform.
A lean chart of accounts with consistent tags produces the same reports with far less room for miscoding, and makes it easier for a new bookkeeper or controller to understand the books.
When and how to change it
Charts of accounts evolve as the company grows, but changes should be deliberate:
- Make structural changes at the start of a month or, better, a fiscal year.
- Map every old account to its new home so prior periods remain comparable.
- Make unused accounts inactive rather than deleting accounts with history.
- Record the change and the reason in a short accounting policy note.
A US subsidiary of a foreign group should keep a US-facing chart of accounts for US tax and reporting, with a mapping table to the parent's group chart for consolidation.
Common mistakes to avoid
- Importing a software default list with hundreds of irrelevant accounts and categorizing inconsistently across them.
- Using a single Owner account for contributions, loans and distributions.
- Creating separate accounts for each customer, vendor or project instead of using sub-ledgers and tags.
- Recording payment processor fees as bank charges inside operating expenses, hiding the true cost of revenue.
- Renaming or merging accounts mid-year so monthly comparisons no longer line up.
- Having no account for deferred revenue, so annual prepayments are reported as revenue on receipt.
NYBACS 360° support
How NYBACS helps
- Designs a chart of accounts for your business model — SaaS, e-commerce, services or a US sales subsidiary.
- Maps expense accounts to US tax return lines so the year-end handover to your tax preparer is straightforward.
- Builds a mapping between the US chart of accounts and your parent company's group reporting chart.
- Migrates existing books to the new structure without breaking prior-period comparisons.
- Documents account definitions so every bookkeeper codes transactions the same way.
Frequently Asked Questions
Does the IRS prescribe a chart of accounts?
No. The IRS requires records that clearly show income and expenses and support the return, but it does not dictate account names or numbers. Mapping accounts to return lines is a practical choice, not a legal requirement.
Should our US subsidiary use the parent company's chart of accounts?
Usually it is better to keep a US chart of accounts that fits US tax and reporting, then map it to the parent's group chart for consolidation. Forcing the parent's structure onto the US books often creates accounts that do not match US return lines.
How many accounts does a startup need?
Most early-stage companies work well with a few dozen active accounts. If you find yourself adding accounts monthly, the extra detail probably belongs in classes, tags or sub-ledgers.
How should multi-currency accounts be set up?
Keep the company's reporting currency in US dollars and give each foreign-currency bank or wallet balance its own account. Exchange differences on revaluation or conversion go to a foreign exchange gain or loss account rather than being absorbed into expenses.
Can we change the chart of accounts after a year of bookkeeping?
Yes. Do it at a period start, map old accounts to new ones, and make obsolete accounts inactive rather than deleting them so history stays intact.
