Chart of accounts: setting one up for a UK small business

A chart of accounts is the list of every account a business uses to record its transactions, usually numbered and grouped into assets, liabilities, equity, income and expenses. UK law does not set one for you, so you design it to fit your business, your year-end accounts and your tax returns. A good chart makes the balance sheet, profit and loss account, VAT Return and Self Assessment or Company Tax Return fall out of your books with little rework.

What is a chart of accounts?

A chart of accounts is the index of your general ledger. Every sale, cost, payment and loan is posted to one of its accounts, sometimes called nominal codes.

Each account has three parts:

• a code, such as 4000
• a name, such as Sales
• a type, which decides whether it appears on the balance sheet or the profit and loss account

Your accounting software loads a default chart that you can edit. Our guide to what bookkeeping is explains how the ledger fits together.

What are the main account types?

Every chart has five account types. The first three appear on the balance sheet; the last two make up the profit and loss account.

See equity and retained earnings for how profit moves from the profit and loss account to the balance sheet.

How should you number the accounts?

Use number ranges so that each type sits in its own block. A common pattern is:

• 1000 to 1999: assets
• 2000 to 2999: liabilities
• 3000 to 3999: equity
• 4000 to 4999: income
• 5000 to 5999: cost of sales
• 6000 to 7999: overheads
• 8000 to 9999: other items, such as depreciation and suspense

This is a convention, not a legal rule, and some packages use different ranges. Leave gaps between codes, such as 4000, 4010, 4020, so you can add accounts later without renumbering.

Which UK rules should the chart follow?

The chart should map cleanly to the reports you must produce. There are three to plan for.

Company accounts. A small limited company’s statutory accounts follow the formats in Schedule 1 of the Small Companies Regulations (SI 2008/409). The balance sheet runs from fixed assets and current assets to creditors due within one year, creditors due after one year, provisions, and capital and reserves. The profit and loss format starts with turnover, cost of sales, gross profit, distribution costs and administrative expenses. Group your codes in the same order. See balance sheet format.

Self Assessment and MTD. HMRC says Making Tax Digital for Income Tax “uses the same categories of income and expenses as Self Assessment”. Its HS229 helpsheet says every figure in your accounts must go in one SA103 box, once only. Keep separate accounts for travel, entertainment and bank charges, because each has its own box.

VAT. VAT Notice 700/21 requires a VAT account showing VAT payable (output tax) and VAT reclaimable (input tax), plus adjustments. Most software creates VAT control accounts for this automatically.

How to set up a chart of accounts

Follow these steps when you start your books or move software:

1. Start from your software’s default chart. It is already linked to the VAT Return and reports.
2. Match your sales lines. Add an income account for each main product or service you want to track.
3. Separate cost of sales from overheads. This gives you a true gross profit figure.
4. Split tax-sensitive costs. Keep entertainment, travel, motor costs and capital items in their own accounts.
5. Add balance sheet accounts. Include each bank account, loans, a director’s loan account and PAYE and pension liabilities.
6. Hide accounts you will not use. A short chart leads to fewer posting errors.
7. Write down the mapping. Note which code goes to which box on the accounts and tax return, as HS229 advises.

Which applies to you?

• If you are a sole trader with turnover under £90,000, HMRC’s MTD guidance, updated 16 October 2026, lets you record transactions simply as income or expense, so a short chart is fine.
• If you are a sole trader over £90,000, map your expense accounts to the full Self Assessment categories, from the start of the tax year.
• If you let residential property, keep finance costs in a separate account, because MTD requires restricted finance costs to be categorised even under £90,000.
• If you run a limited company, add a director’s loan account and share capital account, and group codes in the statutory accounts order. See directors’ loan accounts.
• If you are VAT registered, check the VAT control accounts and the VAT code on each account before your first return.

Common mistakes to avoid

• Using one “general expenses” account for everything, which HS229 says should be used only where no suitable heading exists.
• Posting capital items, such as a laptop, to repairs or office costs.
• Changing codes mid-year, which breaks year-on-year comparisons.

A monthly bank reconciliation will catch most posting errors early.

What to do now

Keep your records for long enough. A limited company must keep accounting records for 6 years from the end of the financial year they relate to, and GOV.UK says HMRC can fine you £3,000 if you do not keep them. Once your chart is set, use the profit margin calculator to check your gross profit figure looks right.

Frequently asked questions

Is there a standard UK chart of accounts?

No. UK law does not set one. Limited companies must present accounts in the Schedule 1 formats, so build your chart to map to them.

How many accounts should a small business have?

Enough to produce your accounts and tax returns, and no more. Most small businesses work from their software’s default list, with unused accounts hidden.

What is a nominal code?

A nominal code is the number given to an account in the chart of accounts, such as 4000 for sales. Different software uses different default codes.

Does Making Tax Digital change my chart of accounts?

It may. MTD for Income Tax uses the Self Assessment categories, so map your expense accounts to them. Sole traders with turnover under £90,000 can record just income or expense.

Can I change my chart of accounts later?

Yes. You can add, rename or hide accounts at any time, but avoid renumbering mid-year, as it makes comparisons harder.