How to set up a chart of accounts that holds up as the business grows
Updated 16 October 2026
A chart of accounts is the list of accounts a business sorts every transaction into. Each sale, bill, payment and transfer lands in exactly one of them, and the financial statements are totals of those accounts. The list decides what the reports can show. A chart with the wrong structure produces reports that answer the wrong questions, however carefully each entry was made. This page covers the five account types, a numbering scheme, how many accounts to keep, how to separate direct costs from overhead, how a franchise sets up its fee lines, and when to restructure.
Five account types in a fixed order
Every chart of accounts uses five types, listed in the same order. Assets are what the business owns or is owed. Liabilities are what it owes. Equity is the owners' stake. Income is what it earns. Expenses are what it spends to earn it. The first three types make up the balance sheet. The last two make up the profit and loss statement. A numbering scheme gives each type its own range and leaves gaps, so new accounts fit in their place without renumbering.
| Range | Type | Examples |
|---|---|---|
| 1000 to 1999 | Assets | Operating bank account, accounts receivable, inventory, equipment |
| 2000 to 2999 | Liabilities | Accounts payable, credit cards, payroll owed, loans |
| 3000 to 3999 | Equity | Owner contributions, owner draws, retained earnings |
| 4000 to 4999 | Income | Sales by revenue line, refunds and discounts |
| 5000 to 5999 | Direct costs | Materials, direct labor, subcontractors |
| 6000 to 7999 | Operating expenses | Rent, office wages, software, insurance, brand fees |
A business has its operating account at 1010 and its payroll account at 1020. It opens a savings account and numbers it 1030. The numbers 1011 through 1019 stay free for later operating accounts. Reports sort by number, so the balance sheet lists cash accounts first, then receivables at 1200, then inventory at 1400, with no renumbering. The figures are an illustration.
Fewer accounts, more tracking
Each account is a choice someone makes on every entry and a line on every report. When two accounts would never lead to different decisions, merge them. Detail that the owner wants by customer, job, location or department belongs in the software's tracking fields, such as classes, locations or tags, which slice the same accounts many ways. A chart that creates a separate income account for each location doubles in size with each new site and still cannot show one location's full profit and loss statement.
A business with three locations has 3 rent accounts, 3 wage accounts and 3 utilities accounts, one per site, for 9 accounts. The bookkeeper merges them into 1 rent, 1 wages and 1 utilities account and tags each entry with its location. The chart drops from 9 accounts to 3. The software then produces a profit and loss statement for each location and one for the whole business from the same entries. The figures are an illustration.
Direct costs apart from overhead
Direct costs are the costs of delivering the product or service: materials, the labor of the people who do the work, and subcontractors. Overhead is the cost of running the business whatever the volume: the office, administrative wages, insurance and software. Placing direct costs in their own section, between income and operating expenses, gives the profit and loss statement a gross margin line. Gross margin shows whether the work itself earns money before overhead.
A business has $900,000 of sales, $540,000 of direct costs and $270,000 of overhead. With direct costs in their own section, the statement shows $360,000 of gross margin, or 40.0% of sales, and $90,000 of operating profit. With all costs mixed into one expense list, the statement shows the same $90,000 profit and no way to tell whether the work or the overhead set it. The figures are an illustration.
Franchise fee lines
A franchisee pays the brand more than one kind of fee, and each kind belongs in its own account. The royalty is the ongoing fee charged as a share of sales. The brand fund is a marketing contribution pooled across the system. Fixed monthly charges, such as a technology fee, do not move with sales. With separate accounts, the owner sees which charge is growing. Across the 368 brands in Averan's library that publish it, the median brand's fees total 9.00% of sales.
Mathnasium's 2026 Franchise Disclosure Document (FDD), the document a franchisor gives a buyer before a sale, lists a 10% royalty, a marketing fee of $250 plus 2% of total sales, a $1,000 monthly minimum digital and local marketing fee, a $266 monthly technology license fee, and a $650 monthly base royalty charged once per franchisee group. A Mathnasium center at the brand's average of $384,874 sells about $32,073 a month. Its month carries about $3,207 of royalty, $891 of marketing fee, $1,000 of local marketing and $266 of technology fee, about $5,365 in all, plus the $650 base royalty. Five accounts show those five charges.
Income accounts that follow the royalty base
A franchise agreement defines the sales the royalty is charged on, and often lists items that come out of that base. When the chart of accounts records those items in their own income or contra-income accounts, the monthly royalty report comes straight from the books. A contra-income account sits under sales and reduces it, such as refunds or discounts. The franchise agreement sets the definitions. For legal questions about the agreement, talk to a franchise attorney.
ServiceMaster Restore's 2026 FDD allows deductions from the royalty base for uncollectible accounts, coupons, sales tax, rented equipment, storage, certain permits and a named list of subcontracted work. Where the Construction Services Amendment is signed, construction revenue sits outside the royalty base. A ServiceMaster Restore owner's chart gives each deduction its own account and splits mitigation sales from reconstruction sales, so the royalty base can be read from the ledger each month.
When to restructure
Restructure when the reports stop answering the owner's questions, when a new business line or acquisition changes what the owner needs to see, or during a cleanup of a file that has drifted. A restructure maps every old account to a new one, moves prior-year balances through that map, and reruns last year's reports in the new layout. Comparisons with prior periods then hold. Restructuring at the start of a fiscal year keeps the change at a clean break. A tighter chart also shortens each month-end close.
A business reaches 140 accounts after six years of additions. The bookkeeper maps them to 62, merging duplicates such as "Software", "Subscriptions" and "SaaS" into one account, and moving per-customer income accounts to customer tracking. Last year's statements are rerun under the 62-account layout, so this year's monthly reports compare line for line with last year. The figures are an illustration.
What this means for an owner
The chart of accounts sets what the reports can show. Five account types sit in a fixed order with numbered ranges and gaps. Detail by customer, job or location belongs in tracking fields. Direct costs sit apart from overhead so gross margin appears. A franchisee gives each brand charge its own account and records royalty-base deductions apart from sales. A restructure maps old accounts to new ones and reruns prior years.
Bookkeeping at Averan
Averan Advisors designs charts of accounts, restructures ones that have drifted and keeps the books on them each month. The bookkeeping service page describes the monthly work, and the systems page covers software setup and tracking fields.
The reading your margins page shows how to break one company-wide margin out by product line, location and service.
If you want this done for you
What happens next
Reading about it and having it done are different things. Here is exactly what happens if you want the second one.
- The call takes thirty minutesYou describe the business and where the numbers are letting you down. We give you an expert view of your situation, and what we would start with. There is no pitch deck.
- We look at the fileYou give us read access to the books as they are. We come back with what is wrong, what it will take to fix, and whether the answer is bookkeeping, controller work, or something else.
- We send a written scope and a priceIt lists what we do each month, what you get, the date it lands and the fee. We agree it before anything starts, and it does not change unless you agree.
- We take over the books and close the first monthWe set up access and systems and enter the opening balances. The first close lands on the date in the scope, and every one after it does too.