What is a chart of accounts?
It's the list of buckets your books sort every dollar into. QuickBooks' help article on the chart of accounts calls it a complete list of your company's accounts and their balances. It also says the account types, along with detail types, decide which reports display the data.
The IRS doesn't hand you a list. Its page on what records to keep says you can use any recordkeeping system suited to your business that clearly shows your income and expenses, and that your books must show your gross income, deductions and credits. So the layout is your choice. The trick is choosing one that answers the questions you'll be asked later.
Why does New Hampshire change how you set it up?
Two state business taxes are filed by the business itself, and each one asks for a different total. A chart of accounts that ignores them makes filing season slower than it needs to be.
The state's business taxes page says the Business Enterprise Tax is assessed on the enterprise value tax base, which is the sum of all compensation paid or accrued, interest paid or accrued and dividends paid by the business. The Business Profits Tax is assessed on taxable business profits. The 2025 BT-Summary instructions add that the filing test for the profits tax uses gross business income from everywhere, which includes total sales, total rents and gross proceeds from the sale of assets, before any costs or expenses.
Those instructions also say the two taxes have different filing thresholds and that you have to decide whether to file each one independently of the other. The state's FAQ pages on the profits tax and the enterprise tax say the Commissioner of the Department of Revenue Administration adjusts both thresholds for inflation every two years. Check the current figures on the business taxes page linked above rather than relying on a number you remember.
For a business whose total gross business receipts are at or under the enterprise tax threshold, the BT-Summary instructions give a short worksheet with three totals: dividends paid, compensation paid or accrued, and interest paid or accrued. Above that threshold a return is required anyway, and the tax is assessed on the same base, so the totals matter either way. The base isn't only employee wages, either. The state's enterprise tax FAQ page says guaranteed payments to partners are included in it. If those amounts are buried inside other accounts, someone has to rebuild the totals by hand at filing time. Give each its own account and whoever prepares the return can build every total from the books.
| Account or group | What goes in it | The question it answers |
|---|---|---|
| Sales or service income | Every sale, before costs | Gross business income for the profits tax test |
| Asset sale records | The full sale price of each vehicle or piece of equipment sold, noted apart from sales income | Gross proceeds counted in gross business income |
| Wages and salaries | Employee pay | Part of compensation in the enterprise tax base |
| Guaranteed payments to partners | Fixed payments a partnership makes to its partners | Also counted in the enterprise tax base |
| Contract labor | Payments to people you don't treat as employees | Keeps contractor pay apart from employee wages |
| Interest expense | Loan and credit line interest | Interest in the enterprise tax base |
| Dividends paid | Dividends the business pays out | Dividends in the enterprise tax base |
The contract labor line matters for your federal return too. The IRS Schedule C instructions put contract labor on line 11 and employee wages on line 26, and they say line 26 shouldn't include amounts paid to yourself. A sole owner who books their own draws as wages ends up with a wages total that doesn't match what that line asks for. How owner pay is treated on the state return is a separate question for your preparer.
Not sure your accounts line up?
Book a free consultation and talk through how your accounts are set up today.
How many accounts should a small business start with?
Fewer than most templates give you. Every account should earn its place by answering a question you'll actually be asked, by the IRS, the state, a lender or you.
| Your business | What we'd suggest |
|---|---|
| Sole owner, no staff, one bank account | The default accounts plus a short expense list, and a separate owner draws account |
| Business with a few employees | Split wages from contract labor and keep payroll taxes in their own accounts |
| Business with a loan or credit line | A liability account per loan and a separate interest expense account |
| Single-member LLC | Books kept for the LLC alone, apart from anything else the owner does |
The last row has a New Hampshire reason behind it. The BT-Summary instructions say a single-member LLC is treated as an entity separate from its member for state tax purposes and has to file its own return, even when it's disregarded for federal purposes. If the LLC's transactions share a ledger with the owner's other work, separating them later is slow, careful work.
Say you run a fencing company in Nashua through a single-member LLC, and you also do some consulting on the side. Keep the LLC in its own file. If it's over the filing threshold, the LLC's gross business income for the state return is then one report rather than an afternoon of sorting.
Which setup mistakes cause trouble at filing time?
They often start with the software's defaults left alone or accounts added in a hurry. QuickBooks has Uncategorized Expense and Uncategorized Income accounts for transactions that still need sorting. Those balances should be close to nothing by year end. A large one means the books haven't been finished, whatever the reports say.
Selling a work truck is another one. The usual entry shows only the gain or loss on the profit and loss. The state's gross business income figure counts the gross proceeds. Keep the full sale price on record and let your tax preparer work out the gain.
A Manchester consultant who's changed bookkeepers twice might also have three accounts that all mean office supplies, each added by a different person. Merge them. QuickBooks lets you make an account inactive, which stops new transactions but keeps the history, so nothing already recorded disappears.
If you're starting fresh or the current setup has drifted, that's the job of QuickBooks setup, and monthly bookkeeping is there if you'd rather someone else sorted each month's transactions.
How do you set one up, step by step?
- Start from the accounts your software creates and delete nothing that holds a balance.
- Add income accounts for each main way you earn money, kept at the total before costs.
- Give wages, contract labor, payroll taxes, any partner payments, interest and any dividends paid their own accounts.
- Keep the expense list short and close to the lines on your federal return.
- If you're a sole owner or a partnership, add an owner draws account so the owners' money never lands in wages.
- Lock parent accounts so transactions post to the more specific accounts under them.
- Review the list once a year and make unused accounts inactive.
The sixth step is a QuickBooks feature worth knowing about. Its help article says a locked account can't be selected when posting transactions, and suggests locking a parent account like Meals so transactions land in the right subaccount for reporting and tax purposes.
If the books are already a year or more into a messy setup, re-sorting the old transactions is catch-up bookkeeping work, and it's best done before the next return rather than during it. If you'd rather talk through what your current list should look like, get in touch. The first consultation is free.
