Chart of accounts for a small UK business: how to set one up.

What a chart of accounts is

Every payment in or out of your business needs a label. A sale goes to sales. A phone bill goes to telephone costs. A loan repayment goes to the loan. The chart of accounts is the full list of those labels, usually with a code number next to each one.

Your profit and loss report and your balance sheet are both built from it. If a cost is coded to the wrong account, it shows up in the wrong place on both. So the chart is less a piece of admin and more the skeleton of your figures.

Most accounting software comes with a default chart when you set up a new business. That default is a starting point, not a finished job.

The five types of account

Every account in the chart belongs to one of five groups. Knowing which is which stops the most common coding errors.

• Assets. Things the business owns or is owed. Bank accounts, money customers owe you, stock, vans, computers and equipment.
• Liabilities. Things the business owes. Supplier bills not yet paid, loans, credit cards, VAT and PAYE due to HMRC, and money owed to a director.
• Equity. The owner's stake. Share capital and retained profits for a company. Capital introduced and drawings for a sole trader.
• Income. Money earned from trading, such as sales and fees, plus other income like interest.
• Expenses. Costs of running the business. These split into direct costs, which rise and fall with sales, and overheads, which do not.

Assets, liabilities and equity sit on the balance sheet. Income and expenses sit on the profit and loss report.

A simple numbering plan

Codes keep the list in a sensible order and make it quicker to find the right account. Many small business charts use number ranges like these. Your software may use different ranges, and that is fine. What matters is that you keep to one plan.

• 0000 to 0999. Fixed assets, such as equipment, vehicles and their depreciation.
• 1000 to 1999. Current assets, such as bank accounts, money owed by customers and stock.
• 2000 to 2999. Liabilities, such as supplier balances, VAT, PAYE, loans and the director's loan account.
• 3000 to 3999. Equity, such as share capital, capital introduced and drawings.
• 4000 to 4999. Income.
• 5000 to 5999. Direct costs, also called cost of sales.
• 6000 to 8999. Overheads.

Leave gaps between codes. If sales are 4000 and fees are 4010, there is room for 4005 later without renumbering.

Which accounts a small business really needs

Most small businesses only need a few dozen active accounts. Fewer accounts means fewer coding choices, which means fewer mistakes. A practical starting list looks like this.

Income

One sales account is often enough. Split it only when the split helps you decide something. A café might separate food from drink. A builder might separate labour from materials. A shop that sells both standard-rated and zero-rated goods may find separate accounts make the VAT return easier to check.

Direct costs

These are costs tied to each sale: stock bought for resale, materials, subcontractors, packaging and delivery to customers. Keeping them apart from overheads lets you work out gross profit properly. If direct costs are mixed in with rent and software, your gross margin will be wrong.

Overheads

Useful overhead accounts for most small businesses include rent and rates, light and heat, telephone and internet, software subscriptions, insurance, motor costs, travel, advertising, accountancy and legal fees, bank charges, wages and salaries, and repairs.

A catch-all "sundry" or "general expenses" account is tempting. Keep it small. If it keeps growing, it is hiding something you should be tracking.

Balance sheet accounts

Set up one bank account in the chart for each real bank account, savings account and credit card. Add accounts for VAT, PAYE and pensions owed if you have them. Limited companies should have a director's loan account for each director. Add a suspense account too, for items you cannot code yet, and clear it every month.

Match the chart to your tax returns

The best chart of accounts maps cleanly to what HMRC and Companies House ask for. That saves a lot of rework at the year end.

• Sole traders and landlords. GOV.UK groups allowable expenses into types such as office costs, travel costs, clothing, staff costs, things you buy to sell on, financial costs, business premises, advertising or marketing, subscriptions and training. If your expense accounts roll up into those groups, your Self Assessment figures are easier to prepare. See our guide to which expenses the self-employed can claim.
• Making Tax Digital for Income Tax. Quarterly updates include totals for each income and expense category used in your digital records. HMRC says Making Tax Digital uses the same categories as Self Assessment. A chart that already follows those categories makes each quarterly update a simple total.
• Limited companies. A company must keep records of all money received and spent, assets owned, debts owed by and to the company, and stock at the year end. Separate accounts for fixed assets, stock, customers, suppliers and loans make each of those easy to show. Our guide to allowable expenses for limited companies covers what a company can claim.
• VAT-registered businesses. You must keep a VAT account showing the VAT you charge on sales and the VAT you pay on purchases. Your software usually builds this from a VAT control account on the balance sheet, so make sure there is one and that each account carries the right default VAT rate.

Common mistakes

• Too many accounts. A separate account for every supplier makes reports long and hard to read. Suppliers belong in contacts, not in the chart.
• Personal and business mixed. Money a sole trader takes out is drawings, not wages. Money a director takes that is not salary or a dividend goes to the director's loan account.
• Assets coded as expenses. A new van or laptop is usually a fixed asset, not a repair or office cost.
• Loan repayments as costs. Only the interest is an expense. The capital part reduces the loan.
• Duplicate accounts. "Phone", "Telephone" and "Mobile" all in use at once. Pick one and archive the rest.
• Changing codes mid-year. Renaming or merging accounts part way through a year makes comparisons with earlier months harder. Make changes at the start of a year where you can.

A worked example

Tidying up an existing chart

If your chart has grown messy, you do not need to start again. Work through it in this order.

• Run a profit and loss and a trial balance for the year so far, so you can see which accounts are actually used
• Archive accounts with no transactions, rather than deleting them
• Merge duplicates, moving the transactions across before archiving the old account
• Check each account's type and default VAT rate
• Clear the suspense account and look at what is sitting in sundry expenses
• Write a short note of what goes where, so anyone coding transactions follows the same rules

If an accountant prepares your year-end accounts, ask them before you make big changes. They may already map your accounts to their own system.

Keeping the chart working

A good chart only helps if transactions are coded to it consistently. That is where regular bookkeeping matters. When bank lines are matched and coded every day, odd items get noticed early and the right account is chosen while the details are fresh. Our guide to bank reconciliation explains the checking side, and the glossary explains terms like trial balance and suspense account.

The chart lives in whichever software you use, such as Xero, QuickBooks, Sage or FreeAgent. You can keep the software you have. See the software we work in.