Understanding Chart of Accounts (COA)
Your chart of accounts is the master list of all accounts in your accounting system. It serves as the backbone for categorizing every transaction and generating accurate financial reports.
A well-organized COA enables clean P&L analysis, tax filing, and business decision-making. A messy one creates reconciliation nightmares and misses deductions.
Account Structure and Numbering
| Account Type | Account Range | Number of Accounts | Examples |
|---|---|---|---|
| Assets | 1000-1999 | 10-20 | 1010 Cash, 1100 Inventory, 1200 Equipment |
| Liabilities | 2000-2999 | 5-10 | 2100 Accounts Payable, 2200 Sales Tax Payable |
| Equity | 3000-3999 | 3-5 | 3100 Owner's Capital, 3200 Retained Earnings |
| Income | 4000-4999 | 10-20 | 4100 Amazon Sales, 4200 Shopify Sales |
| Expenses | 5000-5999 | 40-60 | 5100 COGS, 5200 Advertising, 5300 Shipping |
Essential Accounts for Online Sellers
ASSETS (1000s)
| Account | Code | Purpose |
|---|---|---|
| Checking Account | 1010 | Daily business bank account |
| Savings/Reserve | 1020 | Emergency cash reserves |
| Inventory - FBA | 1100 | Products in Amazon warehouses |
| Inventory - Warehouse | 1110 | Products in your warehouse |
| Fixed Assets | 1200 | Equipment, furniture, vehicles |
| Accumulated Depreciation | 1210 | Depreciation offsetting fixed assets |
LIABILITIES (2000s)
| Account | Code | Purpose |
|---|---|---|
| Accounts Payable | 2100 | Money owed to suppliers |
| Sales Tax Payable | 2200 | Sales tax collected, pending remit |
| Income Tax Payable | 2300 | Estimated tax obligation |
| Amazon Reserve Hold | 2400 | Funds held by Amazon pending release |
INCOME (4000s)
| Account | Code | Purpose |
|---|---|---|
| Amazon FBA Revenue | 4100 | Gross sales from FBA |
| Amazon FBM Revenue | 4110 | Gross sales from Fulfilled by Merchant |
| Shopify Revenue | 4200 | Direct store sales |
| eBay Revenue | 4300 | eBay marketplace sales |
| Refunds & Discounts | 4900 | Customer returns and adjustments |
EXPENSES (5000s) - Critical for Sellers
| Account | Code | Purpose |
|---|---|---|
| Cost of Goods Sold | 5100 | Product cost (COGS) |
| Freight & Shipping (Inbound) | 5110 | Shipping from supplier to warehouse |
| Tariffs & Duties | 5120 | Import taxes (part of landed cost) |
| Amazon FBA Fees | 5200 | Fulfillment & storage fees |
| Referral Fees | 5210 | Commission paid to marketplace |
| Advertising & Marketing | 5300 | Paid ads (Google, Facebook, Amazon) |
| Payroll & Contractors | 5400 | Employee/freelancer wages |
| Software & Subscriptions | 5500 | QuickBooks, CRM, tools |
| Office Supplies | 5600 | Packing materials, labels, boxes |
| Professional Fees | 5700 | Accountant, lawyer, bookkeeper |
| Utilities | 5800 | Electricity, internet, phone |
| Travel & Meals | 5900 | Supplier visits, conferences |
Setting Up COA in QuickBooks
Step-by-Step Setup
- Login to QBO → Click Accounting → Chart of Accounts
- New Account → Select account type (Asset, Liability, Equity, Income, Expense)
- Name & Code → Use codes like 1010, 4100, 5200 for organization
- Description → "Amazon FBA inventory held in warehouses" (for clarity)
- Save → Repeat for all 50-70 seller accounts
- Customize Reports → Filter by account for P&L analysis
QuickBooks COA Best Practices
- Use standardized numbering (don't use 1, 2, 3—use 1000, 1010, 1020)
- Group related accounts (e.g., all income 4000-4999)
- Use descriptive names, not generic "Expense 1"
- Enable account numbers in settings for easier navigation
- Archive unused accounts rather than delete (preserves historical data)
Setting Up COA in Xero
Xero Setup Process
- Business Settings → Chart of Accounts
- Add New Account → Select type (Fixed Asset, Current Asset, etc.)
- Account Code → Enter code (1010, 4100, etc.)
- Tax Type → Set tax treatment (Tax on Sales, Tax on Purchases)
- Save & Repeat → Build full chart
- Track Accounts → Use for profit centers or departments
Xero Advantages
- Built-in tax line mapping (automatically sets tax categories)
- More flexible account codes (not restricted to number ranges)
- Better multi-currency support per account
- Easier to change account structure mid-year
Common COA Mistakes to Avoid
- Too few accounts: Using only 20 accounts hides important profit drivers
- Too many accounts: 150+ accounts become difficult to manage and reconcile
- Inconsistent naming: "Marketing," "Ads," "Advertising" used interchangeably creates confusion
- Mixing COGS with expenses: COGS must be separate from operating expenses
- No account for Amazon fees: Burying fees in COGS distorts true product cost
- Personal and business mixed: Including personal expenses clouds profitability analysis
- Not tracking by channel: Failing to separate Amazon/Shopify/eBay revenue
Seller-Specific COA Additions
For Amazon Sellers: Add FBA reserve holds (2400), FBA fees (5200), and inventory accounts by warehouse (1100, 1110)
For Multi-Channel: Separate income by platform (4100 Amazon, 4200 Shopify, 4300 eBay) for accurate channel profitability
For International Sellers: Add currency exchange gain/loss accounts (6100), landed cost breakdowns
Migrating to a New COA
If your existing COA is disorganized, migration is possible:
- Best practice: Migrate at year-end or quarter-end (cleaner cutoff)
- Process: Create new accounts in parallel, reclassify historical transactions
- Cost: $500-1,500 in bookkeeper time, depending on volume
- Benefit: Clean financial reports and easier tax preparation going forward
Summary: Seller COA Essentials
Start Simple: 40-60 accounts for most sellers (more as you scale)
Separate by Channel: Amazon, Shopify, eBay income accounts
Detail COGS: Break down product cost, freight, tariffs, fees
Use Codes: 1000s assets, 2000s liabilities, 4000s income, 5000s expenses
Review Annually: Adjust accounts based on business changes