Chart of Accounts for a Small Business, With a Canadian Example

Every set of books has a chart of accounts, whether the owner chose it or not. Accounting software ships with a default list, and most small businesses start posting into it on day one without looking at what is in there. Two years later the owner is staring at an income statement with an account called Miscellaneous that holds a fifth of their spending, and nobody can say what is in it.

We spent years in the CRA’s audit division, and the chart of accounts was the first thing we read on almost every file. Not the receipts. The list of accounts and the balances sitting in them. A clean chart told us the owner knew where their money went. A messy one told us where to start asking questions. Here is how to build one properly, with a Canadian example you can copy.

The short answer

A chart of accounts is the complete list of categories your business uses to record every transaction. Each account has a name, a number and a type, and every dollar that moves through the business lands in exactly one of them. The balances in those accounts are what become your balance sheet and your income statement.

For a Canadian small business, the best chart is one built backwards from the tax return you will file. That means the CRA’s General Index of Financial Information if you are a corporation, or the expense lines on Form T2125 if you are a sole proprietor. When your accounts line up with those, year end becomes a mapping exercise instead of a reconstruction.

The five account types and how they fit together

Every account in every chart belongs to one of five types. The first three describe what the business owns and owes at a point in time, and they make up the balance sheet. The last two describe what happened over a period, and they make up the income statement.

1. Assets: what the business owns or is owed. Bank accounts, money customers owe you, equipment, prepaid insurance.
2. Liabilities: what the business owes to others. Supplier bills, credit card balances, sales tax you have collected but not yet remitted, payroll deductions, loans.
3. Equity: what belongs to the owners. Share capital and retained earnings in a corporation, or capital and drawings for a sole proprietor.
4. Revenue: what the business earned from selling goods or services, plus smaller items like interest income.
5. Expenses: what it cost to earn that revenue, usually split between direct costs that rise with each sale and overhead that does not.

The relationship between them never changes. Assets equal liabilities plus equity, and revenue minus expenses is the profit that flows into equity at year end. If an account does not clearly fit one of the five types, it is the wrong account.

Build your chart backwards from the CRA’s own list

This is the part most setup guides skip, and it is the part that saves the most money.

Corporations report their financial statements to the CRA using the General Index of Financial Information, known as the GIFI. The CRA describes it in guide RC4088 as an extensive list of financial statement items where each item has a unique code, and it gives cash, code 1001, as its example. Balance sheet items sit in the 1000 to 3849 range and income statement items sit in the 7000 to 9970 range, according to the CRA’s GIFI guide. Every GIFI return has to include total assets at code 2599, total liabilities at code 3499 and, for a corporation, total shareholder equity at code 3620, and the figures have to balance.

The CRA’s instruction for choosing codes is worth knowing: select an exact match for the items on your financial statements, and if you cannot find one, the most appropriate item, and failing that the generic item. Every time your own account maps cleanly to one GIFI code, that choice is already made.

Sole proprietors do not file a GIFI. They report business income and expenses on Form T2125, and the CRA’s guide T4002 walks through each expense line. The expenses chapter of guide T4002 covers, among others, line 8521 for advertising, line 8523 for meals and entertainment, line 8690 for insurance, line 8710 for interest and bank charges, line 8810 for office expenses, line 8860 for professional fees including legal and accounting fees, line 8910 for rent, line 9220 for utilities, line 9270 for other expenses, line 9281 for motor vehicle expenses, line 9936 for capital cost allowance and line 9945 for business use of home expenses.

Notice that many of those numbers match the GIFI codes for the same kind of expense. Advertising is 8521 in both places, meals and entertainment is 8523, office expenses are 8810. That overlap is useful. If you set up your expense accounts around these categories now, the same chart works if you incorporate later, and you will not have to rebuild your history to file the first corporate return.

A Canadian example chart of accounts

Here is a starting chart for a small Canadian service business that is incorporated, registered for GST/HST and has a vehicle and a couple of employees. The account numbers in the first column are your own and they can be anything, as long as they group logically. The GIFI code in the last column is where each account would land on the corporate return. Every GIFI code shown is taken from the CRA’s RC4088 guide.

A few choices in that table are deliberate, and they are the ones owners most often get wrong.

Every bank account and every credit card gets its own account. If you have two chequing accounts and three cards, you need five accounts, because each one has to be reconciled to its own statement. We explained why that matters in our guide to how to do a bank reconciliation.

The shareholder account is a liability, not an expense. Money the owner puts in or takes out that is not salary or a declared dividend runs through Due to shareholder. It never belongs in wages, and it never belongs in an expense account. How that account behaves over a year is one of the reasons the salary versus dividends decision has to be made on purpose rather than by default.

Equipment is an asset, not an expense. More on that below, because it changes your taxable income.

If you are a sole proprietor, the structure is the same with two changes. Equity becomes Owner’s capital and Owner’s drawings instead of shares and dividends, and your expense accounts map to the T2125 lines listed above rather than to GIFI codes.

Sales tax needs its own accounts, and they are not revenue

This is the single most common chart of accounts error we saw in audit work. The owner posts the full amount of every deposit to revenue, including the GST/HST, and then posts the remittance to the CRA as an expense. The income statement overstates both sides, and nobody can tie the sales tax return to the books.

The CRA’s guide RC4022 for GST/HST registrants sets out the calculation you are making every reporting period: the GST/HST you collected or that became collectible on your sales, less the GST/HST paid and payable on business purchases for which you can claim input tax credits. The difference is your net tax, and it is either a remittance or a refund.

Your chart should mirror that calculation exactly. One liability account for tax collected, one offset account for the input tax credits you are claiming, and nothing else touching either of them. When the return is due, the two balances are the two main lines of the return. The GIFI groups GST/HST with other taxes payable at code 2680, which is why both accounts map there in the example.

If you are not yet registered, you do not need these accounts. You do need to know when that changes, which we covered in our guide to registering for GST/HST.

Capital purchases belong on the balance sheet

A new laptop, a truck or a piece of equipment is not an expense in the year you buy it. It is an asset, and it is deducted over time through capital cost allowance, which is line 9936 on the T2125.

The CRA’s test, set out in guide T4002, is whether the purchase provides a lasting benefit. A capital expense generally gives a lasting benefit or advantage, while a current expense usually recurs after a short period. The guide’s own example is a house: vinyl siding is capital, painting is current.

Your chart needs asset accounts for the categories of equipment you actually own, and an accumulated amortization account beside each one. If every purchase goes to Office supplies because that is the account the software suggested, your expenses are overstated in the year of purchase, and an auditor will move them back. Vehicles have their own set of rules on top of this, which our guide to business vehicle expenses works through in detail.

Why the chart needs receivables and payables from day one

Some owners set up a chart with a bank account and a list of expenses and nothing else, on the theory that they will record things when money moves. For most businesses that is not allowed.

The CRA’s guide T4002 is plain on this in its general information chapter: farmers, fishers and self employed commission agents can use the cash method or the accrual method, and all other self employment income must be reported using the accrual method. That means income is reported when it is earned rather than when it is paid, and you need an accounts receivable account to hold it in between. The same logic applies to bills you owe, which is what accounts payable is for.

How many accounts is the right number

Fewer than most software defaults, and more than most owners want.

A small service business rarely needs more than thirty to forty accounts. A product business with inventory, cost of goods sold and several sales channels may need more. The test is simple: every account should either appear on the tax return as its own line, or be something you genuinely want to watch on your monthly reports. If it does neither, merge it into the account it would be reported with.

The opposite problem is just as real. Creating a sub account for every supplier or every client turns the chart into a contact list and makes the reports unreadable. Suppliers and customers belong in the vendor and customer lists, not in the chart. Your reports can still be run by supplier without making the chart carry them.

What an auditor reads in your chart of accounts

Here is what we looked for first, in roughly this order, and what each finding usually meant.

1. A large Other or Miscellaneous balance: anything over a small percentage of total expenses told us the coding was not being reviewed. Line 9270 on the T2125 and code 9270 in the GIFI both exist for genuine odds and ends, not for everything the owner was unsure about.
2. An Ask my accountant or suspense account with a year end balance: unresolved items that went onto a filed return as if they were resolved. Clearing these before year end is part of any proper bookkeeping cleanup.
3. Personal expenses sitting in business accounts: groceries in meals, family phones in telephone, a cottage in repairs. The chart cannot stop these, but separate accounts for the owner’s draws and a Due to shareholder account give them somewhere honest to go.
4. Meals and entertainment buried inside another account: the deduction for food, beverages and entertainment is generally limited to 50 percent under line 8523, so posting them to office or travel overstates the deduction. They need an account of their own. Our overview of small business write offs covers the limit alongside the other common deductions.
5. A chart that changed partway through the year: accounts renamed, merged or deleted with no record of what moved where. It makes the prior year comparison impossible and it breaks the audit trail.

None of those findings is a penalty in itself. What they do is widen the review, because an auditor who finds one coding problem has good reason to look for the next.

Setting up or fixing your chart

If you are starting fresh, set the chart up before the first transaction goes in. Start from the example above, remove what does not apply, add the specific accounts your industry needs, and write down which GIFI code or T2125 line each account maps to. Our new business bookkeeping checklist puts this step alongside the others worth doing in the first month.

If you are fixing an existing chart, three rules keep the history intact.

1. Rename rather than delete: an account with transactions in it should be renamed or merged into its replacement, never deleted, so the history moves with it.
2. Change at a period end: make structural changes at the start of a new fiscal year or at minimum a new month, so the reports on either side of the change still make sense.
3. Keep a written record of the change: a short note of what was merged into what, and when. Records have to be kept for six years from the end of the last tax year they relate to, according to the CRA’s page on how long to keep your records, and a chart change that nobody can explain is a gap in them. Our guide to small business record keeping covers the rest of the rule set.

At year end, the mapping you wrote down becomes the working paper that turns your trial balance into a return. Our year end bookkeeping checklist walks through the rest of that close.

A chart of accounts is only the structure. It is what makes the rest of the work in our guide to small business bookkeeping in Canada possible, because nothing can be coded consistently until the categories are right.

Frequently asked questions

What is a chart of accounts for a small business?

It is the complete list of categories a business uses to record its transactions, grouped into five types: assets, liabilities, equity, revenue and expenses. Each account has a name, a number and a type, and every transaction lands in one of them. The balances become the balance sheet and the income statement.

How should I number my chart of accounts?

A common approach is to number assets in the 1000s, liabilities in the 2000s, equity in the 3000s, revenue in the 4000s, cost of sales in the 5000s and operating expenses in the 6000s and up. The exact numbers are your choice. What matters more for a Canadian business is recording which CRA GIFI code or T2125 line each account maps to, so the return can be prepared directly from the books.

What is the GIFI and do I need to use it?

The General Index of Financial Information is the CRA’s list of financial statement items, each with a unique code, that corporations and partnerships use to report their financial statements with their returns. Balance sheet items use codes in the 1000 to 3849 range and income statement items use codes in the 7000 to 9970 range. Sole proprietors report on Form T2125 instead, but building your accounts around the same categories makes a later incorporation much simpler.

Should GST/HST go in my revenue account?

No. GST/HST you collect is money you owe the CRA, so it belongs in a liability account, with the GST/HST you pay on business purchases tracked in a separate account for input tax credits. The difference between the two is your net tax for the period. Posting sales tax to revenue overstates your income and makes the return impossible to tie back to the books.

How many accounts should a small business have?

Most small service businesses work well with thirty to forty accounts, and product businesses may need more. Every account should either be its own line on the tax return or be something you want to track on monthly reports. Suppliers and customers belong in their own lists, not as separate accounts in the chart.

If your chart has grown out of control

Most charts we see were never designed. They accumulated, one suggested account at a time, and the result is a set of reports nobody trusts. Fixing it is usually a few hours of mapping work, and it pays for itself at the first year end. If you would rather have it done for you, our bookkeeping service starts every new client with a chart built around their return, and we are happy to look at yours before you commit to anything.