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To set up a chart of accounts for a Canadian small business, start with five groups (assets, liabilities, equity, income and expenses) and then split the expenses to match the lines on your tax return. If you’re a sole proprietor, that return is form T2125, and it has about twenty named expense lines. Build your accounts around them and year end gets a lot less painful.
What is a chart of accounts?
It’s the list of labels your bookkeeping uses. Every dollar that comes in or goes out gets filed under one label, and the reports you read at the end are just those labels added up. A good list is short enough that you use it properly and detailed enough that your accountant doesn’t have to dig.
Which accounts should you start with?
Five groups cover everything. Assets are what you own, like your bank account and equipment. Liabilities are what you owe, such as a credit card or GST/HST you’ve collected but haven’t sent in. Equity is what’s left for the owner. Income is what you earn, and expenses are what you spend.
The numbering below is a common habit, not a rule. The CRA doesn’t require any particular numbers, and your software will probably suggest its own.
| Number range | Group | Examples |
|---|---|---|
| 1000 to 1999 | Assets | Bank, receivables, equipment |
| 2000 to 2999 | Liabilities | Credit card, GST/HST payable, payroll owing |
| 3000 to 3999 | Equity | Owner’s draws, owner’s contributions |
| 4000 to 4999 | Income | Sales, service fees |
| 5000 to 9999 | Expenses | Rent, office costs, advertising |
How should you name the expense accounts?
Borrow the CRA’s own wording. Part 4 of form T2125 lists lines such as advertising, insurance, interest and bank charges, business taxes, licences and memberships, office expenses, professional fees, rent, repairs and maintenance, salaries, wages and benefits, travel, utilities and motor vehicle expenses. There’s also a line for capital cost allowance and a catch-all line for other expenses.
If your accounts map to those lines, you can copy the totals across and you’re done. If they don’t, you’ll spend an evening sorting a year of transactions by hand. That’s a bad way to find out.
Corporations file a different return, and we didn’t check its line layout here. The same idea still holds: ask your accountant which categories they need, then name your accounts to match.
What does it look like with real numbers?
Say you’re an Ontario consultant. You bill $120,000 in the year and spend $40,000 across rent, software, insurance, phone and professional fees. Your net business income is $80,000, and that figure is what goes on the tax form.
The self-employed tax calculator puts income tax at $13,233.57 and CPP at $8,892.90 for both halves, so $22,126.47 in all, leaving $57,873.53. If you’d lumped $10,000 of spending into “other”, nothing changes in the maths, but you’d have no way to explain it in an audit. If you charge sales tax, use the GST and PST calculator to check a few invoices against your books.
Mistakes that make a chart useless
Too many accounts is the first. Forty expense lines for a one-person shop means you’ll guess which to use. Too few is the opposite problem: a single “expenses” account tells you nothing.
Next, a giant “miscellaneous” bucket. Keep it small, and review it every quarter. Personal spending run through the business is another; use the equity draws account for money you take out, not an expense line. And don’t rename accounts mid-year without noting it, because your reports won’t compare cleanly.
The CRA says your records have to be reliable and complete and include what you need to meet your tax obligations. Generally you keep them for six years from the end of the last tax year they relate to. A tidy chart of accounts is what makes that pile readable. If you have staff, add payroll accounts and check your figures with the payroll remittance calculator.
Where the numbers come from
The expense line names come from the Canada Revenue Agency’s guidance on form T2125, and the record rules from its pages on keeping records. The example figures come from this site’s calculator, which uses 2026 rates and leaves out GST/HST, EI and expenses.
Frequently asked questions
How many accounts does a small business need?
There is no official count. A one-person business often does well with a short list that mirrors its tax return lines, and you can add accounts later.
Does the CRA require a specific chart of accounts?
We found no required list or numbering. The CRA asks that your records be reliable and complete.
Can I use the T2125 expense lines as my accounts?
Yes for a sole proprietor. Matching them makes it easy to copy totals onto the form at year end.
How long do I keep my accounting records?
Generally six years from the end of the last tax year they relate to, unless the CRA gives permission to destroy them earlier.
Should the owner's draws be an expense?
No. Money you take out for yourself goes in an equity account, so it doesn't reduce your reported profit.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST
Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.