# Choosing accounts for transactions

> A practical framework for deciding which chart-of-accounts category each transaction belongs in — with a decision tree and a cheat-sheet of common patterns.

Source: https://www.accountfun.com/docs/concepts/coding-transactions/

Once you understand [double-entry](https://www.accountfun.com/docs/concepts/double-entry/), the next skill is **coding**: deciding *which account* each part of a transaction belongs in. When you create an [invoice](https://www.accountfun.com/docs/guides/invoices/) or [bill](https://www.accountfun.com/docs/guides/bills/), Spend Money, or a [manual journal](https://www.accountfun.com/docs/guides/manual-journals/), you’re asked to pick an account for every line. This guide gives you a repeatable way to choose correctly, even if you’ve never done bookkeeping before.

## Start with the chart of accounts

Every account in your books has a **type**, and that type is the key to everything. AccountFUN groups them into five sections (see the [Chart of accounts guide](https://www.accountfun.com/docs/guides/chart-of-accounts/) for the full list):

| Section         | Examples                                      | Natural side |
| --------------- | --------------------------------------------- | ------------ |
| **Assets**      | Cash, inventory, equipment, money owed to you | Debit        |
| **Liabilities** | Unpaid bills, loans, tax you owe              | Credit       |
| **Equity**      | Owner’s investment, retained earnings         | Credit       |
| **Revenue**     | Sales, service income, interest earned        | Credit       |
| **Expenses**    | Rent, supplies, wages, utilities              | Debit        |

The “natural side” just means the direction in which that account normally *grows*. Remember: **Assets and Expenses are debit-natural; Liabilities, Equity, and Revenue are credit-natural.** When in doubt, this single rule resolves most questions.

## The two questions to ask

For any transaction, answer these in order:

1. **What actually happened?** Describe it in plain English, including what came in and what went out (or what was promised either way).
2. **Which accounts gained and lost?** Map each effect to an account type.

The plain-English description is the most important step. Most miscoding comes from skipping straight to “which dropdown?” without first naming the reality.

## A decision tree

```text
Did cash (or a bank balance) move?
│
├─ YES, money came IN  →  Cash/Bank is DEBITED.
│      What did you get it for?
│        ├─ Sold something              → Revenue (credit)
│        ├─ Customer paid a debt        → Accounts Receivable (credit)
│        ├─ Took out a loan             → Loan/Liability (credit)
│        └─ Owner put in money          → Equity (credit)
│
├─ YES, money went OUT →  Cash/Bank is CREDITED.
│      What did it buy or settle?
│        ├─ Bought a consumable/service → Expense (debit)
│        ├─ Bought a lasting asset      → Asset, e.g. Equipment (debit)
│        ├─ Paid a supplier you owed    → Accounts Payable (debit)
│        └─ Repaid a loan               → Loan/Liability (debit)
│
└─ NO cash moved (yet)  →  it's "on credit" or a non-cash event.
       ├─ Received a bill you'll pay later
       │      → Expense (debit)  +  Accounts Payable (credit)
       ├─ Raised an invoice you'll collect later
       │      → Accounts Receivable (debit)  +  Revenue (credit)
       ├─ Used up a prepayment / accrual
       │      → Expense (debit)  +  Prepaid Asset (credit)
       └─ Owner took goods / adjustments
              → Equity/Drawings  +  the affected asset/expense
```

That tree covers the overwhelming majority of real transactions. If you can place your event on it, you’ve chosen the right accounts.

Trace the cash first

The branch on the left (“did cash move?”) is the reliable anchor. Find the **bank** line first — it’s always either cash in (debit the bank) or cash out (credit the bank) — then ask what the *other* side was. One side pinned, the other side follows.

## AccountFUN’s default chart, by number range

Your org starts with a default chart organized in loose number ranges. Knowing the ranges helps you find the right account fast when a dropdown is long:

| Range       | Section                        | What lives here                                       |
| ----------- | ------------------------------ | ----------------------------------------------------- |
| **000–099** | Bank & cash                    | Business bank accounts, savings                       |
| **200–299** | Revenue                        | Sales, service income, other income                   |
| **300–399** | Direct costs                   | Cost of goods sold                                    |
| **400–499** | Expenses                       | Operating costs — rent, wages, utilities, advertising |
| **600–799** | Assets                         | Receivables, inventory, equipment, vehicles           |
| **800–899** | Liabilities                    | Payables, tax payable, FX accounts                    |
| **900+**    | Equity + long-term liabilities | Owner’s equity, retained earnings, loans, mortgage    |

So when you’re coding an everyday expense, you’re usually picking from the 400s. When you record a sale, it’s the 200s. Money moving between your own accounts stays in the 000s.

## A cheat-sheet of common transactions

Real-world mapping, with the account types and the typical default-account name. (Your exact names may differ slightly — rename accounts freely under [Chart of Accounts](https://www.accountfun.com/docs/guides/chart-of-accounts/).)

| Transaction                                    | Debit (Dr)                     | Credit (Cr)           |
| ---------------------------------------------- | ------------------------------ | --------------------- |
| Sell a product/service (paid now)              | Bank                           | Sales Revenue         |
| Sell on terms (invoice, paid later)            | Accounts Receivable            | Sales Revenue         |
| Customer pays an invoice                       | Bank                           | Accounts Receivable   |
| Buy office supplies (paid now)                 | Office Supplies (expense)      | Bank                  |
| Receive a supplier bill (pay later)            | Expense (e.g. Utilities)       | Accounts Payable      |
| Pay a supplier bill                            | Accounts Payable               | Bank                  |
| Pay rent                                       | Rent (expense)                 | Bank                  |
| Pay wages                                      | Salaries & Wages (expense)     | Bank                  |
| Buy a laptop to keep (> \~$500–1,000)          | Computer Equipment (asset)     | Bank or Loan          |
| Buy a cheap item (< threshold, e.g. a stapler) | Office Supplies (expense)      | Bank                  |
| Take out a loan                                | Bank                           | Loan (liability)      |
| Repay a loan                                   | Loan (liability)               | Bank                  |
| Owner invests cash                             | Bank                           | Owner’s Equity        |
| Owner takes cash out (drawing)                 | Owner’s Drawings (equity)      | Bank                  |
| Move money between bank accounts               | Destination Bank               | Source Bank           |
| Charge sales tax on a sale                     | (added to the receivable/cash) | Tax Payable           |
| Record input tax on a purchase                 | Tax Receivable / Tax Payable   | (part of the payment) |

Sales tax in AccountFUN

You don’t post tax lines by hand. When you set a **Tax Rate** on an invoice or bill line, AccountFUN calculates the tax and posts it to **Tax Payable** (for sales) or recovers it (for purchases) automatically. Just pick the right tax rate — the entry is handled for you.

## Asset vs. expense: the one judgment call

The trickiest choice for newcomers is **“is this an expense or an asset?”** when you buy something. The rule of thumb:

* **Expense it** if it’s consumed quickly or costs below your capitalization threshold — supplies, a coffee, a $40 software subscription, electricity.
* **Capitalize it as an asset** if it’s a lasting, higher-value purchase you’ll use for years — a laptop, a vehicle, machinery. These go to an asset account (like *Computer Equipment*) and are [depreciated](https://www.accountfun.com/docs/guides/fixed-assets/) over their useful life.

A practical threshold many small businesses use: **under \~$500–1,000, expense it; over, capitalize it.** Pick a threshold and apply it consistently. AccountFUN doesn’t force a number — you decide based on what’s right for your business and tax rules.

## Common mistakes (and how to avoid them)

* **Coding the bank both ways.** The bank line is *one* side only — cash in is a debit, cash out is a credit. Don’t debit *and* credit the bank in the same entry unless it’s a transfer between two of your own accounts.
* **Mixing personal and business.** Owner investments and drawings go to an **Equity** account, not a revenue or expense account. Putting owner cash into Sales Revenue overstates your income.
* **Treating a loan repayment as an expense.** Repaying a loan reduces a **liability**, not an expense. Only the *interest* portion is an expense (and your lender statement breaks that out).
* **Forgetting the “on credit” leg.** When you enter a [bill](https://www.accountfun.com/docs/guides/bills/), the expense and the payable are both recorded — you don’t also move cash. Cash moves separately when you pay it.
* **Categorizing transfers as income/expense.** Moving money between your own accounts isn’t income or an expense — it’s a **Transfer** between two asset accounts. (AccountFUN’s **Transfer Money** does this correctly.)

## How AccountFUN keeps you on track

A few built-in guardrails reduce the chance of miscoding:

* **Account filters on document lines.** When you create an invoice, the line accounts are filtered to **revenue** types; on a bill, to **expense/asset** types; on Spend Money, every non-bank account is available. The dropdown steers you toward sensible choices.
* **Default tax rates per account.** Each account can carry a default tax rate, auto-applied when you pick the account — one less thing to get wrong.
* **[Bank reconciliation](https://www.accountfun.com/docs/guides/bank-reconciliation/).** This is the ultimate safety net. When you clear a bank line as **Create** (Spend/Receive Money), you’re explicitly choosing the category *with the real transaction in front of you*. Mis-categorized lines are easy to spot and fix because the bank knows the truth.
* **[Reports](https://www.accountfun.com/docs/guides/reports/).** The Profit & Loss and Balance Sheet are literally your accounts grouped by type. If “Office Supplies” looks far too high, you’ll notice — and drill from any total straight to the entries behind it.

## The mindset

Coding transactions well is mostly about **describing reality accurately**, not memorizing rules. Ask *“what actually happened, and which bucket does each part belong in?”* — and when you’re unsure, follow the cash side first and let the other side follow. Over a few weeks of [reconciling](https://www.accountfun.com/docs/guides/bank-reconciliation/), the right accounts become obvious, and your books will tell a clear, true story about your business.