CHART OF ACCOUNTS

A chart of accounts is the list of every account the business records transactions in. For a sole proprietor, the most useful chart is one built backwards from Form T2125, so that at year end each expense account rolls straight onto a line of the tax form. This page sets out a numbering system, a sample chart for a small service or retail proprietorship, and the accounts that need special handling for GST/HST, meals, vehicles and the home office. How the accounts are used in journal entries is covered on the Bookkeeping Fundamentals pages.

NUMBERING SYSTEM

• 1000 to 1999, assets: cash, receivables, inventory, prepaid expenses and equipment.

• 2000 to 2999, liabilities: payables, credit cards, sales tax owing, payroll deductions owing and loans.

• 3000 to 3999, equity: owner's capital and owner's drawings.

• 4000 to 4999, revenue: sales, fees and other income.

• 5000 to 5999, cost of goods sold: purchases, freight-in and direct labour, for businesses that sell goods.

• 6000 to 6999, operating expenses: one account for each T2125 expense line the business uses.

• Gaps between numbers: leave room (1010, 1020, 1030) so new accounts can be added in the right place later.

SAMPLE CHART: ASSETS AND LIABILITIES

• 1010 Business chequing: the main operating account.

• 1020 Business savings: money set aside for tax, CPP and GST/HST owing.

• 1100 Accounts receivable: invoices issued but not yet paid.

• 1200 Inventory: goods held for sale, for businesses that sell products.

• 1300 Prepaid expenses: insurance or rent paid in advance.

• 1500 Equipment and 1510 Computers: capital assets at cost, kept by CCA class so the year-end CCA schedule is easy to prepare.

• 1600 Vehicle: the cost of a vehicle used in the business.

• 2010 Accounts payable: supplier bills not yet paid.

• 2100 Business credit card: balance owing on the card used for business purchases.

• 2200 GST/HST collected and 2210 GST/HST paid (ITCs): two separate accounts, netted on each return.

• 2300 Payroll liabilities: employee source deductions and employer CPP and EI owing, if the business has employees.

• 2500 Loans payable: business loans and lines of credit.

SAMPLE CHART: EQUITY, REVENUE AND EXPENSES

• 3010 Owner's capital and 3020 Owner's drawings: the only equity accounts a proprietorship needs.

• 4010 Sales or fees: main revenue, excluding sales tax. Separate accounts can track different services or product lines.

• 4900 Other income: recovered bad debts, grants and interest earned in the business account.

• 6010 Advertising (8521): ads, website and promotional costs.

• 6020 Meals and entertainment (8523): the full amount is recorded; the 50% limit is applied at year end.

• 6050 Insurance (8690), 6060 Interest and bank charges (8710), 6070 Licences and memberships (8760): one account per line.

• 6080 Office expenses (8810) and 6085 Office supplies (8811): kept separate because they are separate T2125 lines.

• 6100 Professional fees (8860), 6110 Rent (8910), 6120 Repairs and maintenance (8960): one account per line.

• 6140 Wages (9060): employee pay and the employer share of CPP and EI. Never used for the owner.

• 6160 Travel (9200), 6170 Telephone and utilities (9220), 6180 Delivery and freight (9275): one account per line.

• 6200 Vehicle expenses (9281): fuel, insurance, repairs and registration, recorded in full and prorated at year end using the logbook.

ACCOUNTS THAT NEED SPECIAL HANDLING

• Sales tax: GST/HST collected is a liability, not revenue, and GST/HST paid on purchases is recorded separately so input tax credits can be totalled for each return. Under the Quick Method, a single sales tax payable account is used, and the amount kept is moved to other income.

• Owner's CPP and income tax: these are personal. If paid from the business account, they are recorded as drawings, not as an expense.

• Mixed-use costs: vehicle and phone costs are recorded in full in their own accounts and the personal share is removed by a year-end adjusting entry to drawings.

• Home office: home costs are usually paid personally and are not recorded in the business books during the year. The business share is calculated at year end on Form T2125.

• Capital purchases: equipment lasting more than a year is recorded as an asset, not as an expense, even if it is cheap. Small tools under $500 can be grouped into one asset account for Class 12.

DESIGN TIPS

• Mirror the T2125: every expense account should map to exactly one T2125 line, so the tax form can be filled in from the trial balance without reallocating.

• Keep it short: 30 to 50 accounts is enough for most proprietorships. Too many accounts lead to inconsistent coding.

• Avoid "miscellaneous": a large miscellaneous account hides deductible expenses and draws attention in a review. Use other expenses only for items that fit nowhere else.

• Stay consistent: once an account is used for a type of cost, use it the same way every year so year-to-year comparisons are meaningful.

KEY POINTS

• Build from the T2125: one expense account per tax-form line.

• Sales tax is not income: keep collected and paid tax in separate balance sheet accounts.

• Owner's pay is drawings: including the owner's own CPP and income tax.

• Record in full, adjust at year end: meals at 50% and mixed-use costs by business percentage.

SOURCES

• Canada Revenue Agency: Form T2125 and Guide T4002, Chapter 3, Expenses.

• Canada Revenue Agency: Guide RC4022, General Information for GST/HST Registrants.