It's grouped into five types: assets, liabilities, equity, revenue, and expenses. Every transaction you record lands in one of these accounts, and those accounts roll up into your financial statements — revenue and expense accounts into your P&L, the rest into your balance sheet.
Why setup matters: a chart of accounts built for your industry is the difference between reports that answer questions and reports that don't. A restaurant needs food and beverage split out to track cost of goods sold; a contractor needs job costing; a real-estate investor needs per-property tracking. A generic default chart hides exactly the numbers you most need to see.
The trap to avoid: too many accounts is as bad as too few. A bloated chart makes categorization inconsistent and reports noisy. The goal is enough detail to run the business, and no more — which is why a clean initial setup pays off for years.
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Part of the Tides Bookkeeping Glossary — and the complete guide to small business bookkeeping.