The chart of accounts (COA) names and numbers every category the books recognise, conventionally grouped in balance-sheet-then-income-statement order: assets, liabilities, equity, revenue, expenses. Accounting software ships with a default chart that most small businesses lightly customise.
Every recorded transaction must land in an account from the chart — which is exactly what you are doing when software asks you to "categorise" a payment.
Why It Matters
The chart decides the resolution of every future report. One undifferentiated "Sales" account means you will never see revenue by service line; forty micro-categories for expenses means half of them get misused. The craft is a lean chart that answers the questions you actually ask — and for invoicing businesses, a revenue account per major service line is usually the single most useful refinement.
Example
A designer splits revenue into 4010 Design Services and 4020 Retainers. Six months later the reports show retainers now carry 60% of income — a pricing insight the old single "Sales" account could never have surfaced.
Frequently Asked Questions
How many accounts should a small business have?
As few as answer your real questions — commonly a few dozen. Add an account when a category you track has meaningfully different behaviour, not for every new vendor or one-off purchase.