Chart of accounts: how to structure one for a Canadian corporation

What a chart of accounts is

A chart of accounts is the list of buckets your bookkeeping sorts transactions into. Every sale, expense, asset, and loan lands in one of them, and your financial statements are simply those buckets totalled and arranged.

It sounds administrative, and it is the most consequential setup decision in your books. Too few accounts and your statements cannot answer basic questions about where the money went. Too many and nothing is comparable month to month because similar costs get split across near-identical buckets.

The five categories

Every account belongs to one of five types, and the first three make up your balance sheet while the last two make up your income statement.

Assets are what the business owns or is owed: bank accounts, receivables, inventory, equipment, vehicles.

Liabilities are what it owes: payables, credit cards, loans, and importantly the GST or HST you have collected and the source deductions you have withheld, neither of which is your money.

Equity is the owners’ stake: share capital, retained earnings, and any shareholder contributions.

Revenue is what you earn. Expenses are what it costs to earn it.

Most systems number accounts by category, so assets occupy one range, liabilities the next, and so on. The numbering itself carries no accounting meaning, but a consistent scheme makes accounts easy to find and keeps new ones from being dropped in the wrong place.

The Canadian part: GIFI codes

Here is the piece most generic guidance omits. When a Canadian corporation files a T2, it does not attach financial statements as a document. It reports the financial statement figures using the General Index of Financial Information, known as GIFI. Every balance sheet and income statement line is reported against a standard GIFI code.

Those figures go on Schedule 100 for the balance sheet, Schedule 125 for the income statement, and Schedule 141 for the notes on who prepared the statements.

The practical consequence is that your chart of accounts should map cleanly onto GIFI. When each of your accounts corresponds to a GIFI code, preparing the T2 is a translation. When it does not, someone has to reallocate your accounts into GIFI categories every single year, which is slow, easy to do inconsistently, and a common source of figures that do not tie to last year’s return.

This is the main reason to think about the chart of accounts before your first year-end rather than after it.

Structure it around your decisions

Beyond the compliance layer, the useful question is what you need your statements to tell you.

If you run several service lines, separate revenue accounts let you see which one actually makes money. If your costs are mostly labour and materials, splitting direct costs from overhead gives you a gross margin, which is the number that tells you whether your pricing works. If you have multiple locations or crews, tracking those separately is usually more useful than adding more expense categories.

Be careful with accounts that exist for tax reasons rather than management ones. Meals and entertainment needs its own account because the deduction is generally limited to fifty per cent, as covered in our guide on the meals and entertainment deduction. Vehicle costs need separating for the same reason, and our guide on vehicle expenses through a corporation explains why.

Accounts owners commonly get wrong

The most frequent error is treating GST or HST collected as revenue. It is a liability. You collected it on behalf of CRA and you will remit it. Booking it as income inflates your sales and understates what you owe.

Payroll source deductions are the same. Amounts withheld from employees are held in trust and belong in a liability account, not in wage expense.

Shareholder transactions are the third. Money moving between you and the corporation belongs in a shareholder loan account, tracked deliberately, because the tax consequences depend on the balance and how long it stays outstanding. Our guide on shareholder loan rules covers the trap.

The fourth is capital purchases booked as expenses. Equipment and vehicles are assets depreciated over time through capital cost allowance, not costs deducted in the year you bought them.

Set it up once, properly

Changing a chart of accounts mid-year is possible but it breaks comparability, and comparing this year to last is most of what financial statements are for. It is worth an hour at setup with someone who will also be preparing your T2, because they will build it to map to GIFI from the start.

Want the books set up right the first time? See bookkeeping services, bookkeeping for small business, or corporate tax.