How to Set Up Your Chart of Accounts for a New Business

Your chart of accounts is the filing system that makes or breaks your bookkeeping. Every transaction—whether it's a £50 supplier invoice or a £2,000 equipment purchase—gets assigned to an account in this system. Get it right from the start, and your financial records stay clean and useful. Get it wrong, and you'll spend weeks reclassifying transactions and squinting at reports that tell you nothing about where your money actually goes.

This post walks you through setting up a chart of accounts for a new business—the foundation that every accounting system, from a spreadsheet to modern cloud software, sits on top of.

What is a chart of accounts and why it matters

A chart of accounts (COA) is simply a complete list of every account your business uses to record financial transactions. Think of it as a folder structure for money. Each account falls into one of five universal categories:

Assets — What your business owns (bank accounts, equipment, money customers owe you)
Liabilities — What your business owes (loans, credit cards, tax bills)
Equity — Your stake in the business (capital you've invested, retained earnings)
Revenue — Money coming in (sales, service income, interest)
Expenses — Money going out (rent, utilities, salaries, supplies)

These five categories are universal. A consultancy, a shop, a construction firm—they all use the same framework. The difference is in the detail accounts you create beneath each category.

Your chart of accounts directly feeds into three critical things: your profit and loss statement (which shows revenue and expenses), your balance sheet (which shows assets, liabilities, and equity), and your tax filing (which requires expenses to align with what the tax authority expects). A well-structured COA gives you clarity and speed. A poorly structured one gives you confusion and late nights before the filing deadline.

How to set up your chart of accounts: step by step

Step 1: Start with a template, not a blank page. You don't need to reinvent this. Most accounting software comes with a default template based on your business type and region. These templates include the standard accounts most businesses need. Starting with a template and customising it is far faster than building from zero (and far less error-prone). Modern platforms provide sensible defaults that you can adjust as your business evolves.

Step 2: Use a numbering system. Most accounting systems use a standardised range to organise accounts. The pattern is:

1000–1999: Assets
2000–2999: Liabilities
3000–3999: Equity
4000–4999: Revenue
5000–5999: Cost of goods sold
6000–6999: Operating expenses
7000–7999: Other expenses and depreciation

The exact numbers vary, but the principle is consistent: lower numbers for the balance sheet stuff (assets, liabilities, equity) and higher numbers for the income statement (revenue, expenses). The gaps in numbering are intentional—if your main bank account is 1000, use 1010 for savings, 1020 for petty cash. The gaps let you add new accounts later without disrupting the structure.

Step 3: Customise for your business. Ask yourself:

What products or services do you sell? If you have multiple revenue streams, create separate revenue accounts (e.g., "Consulting Income" and "Training Income" rather than a vague "Sales" bucket).
What are your major expense categories? Break them into categories that actually matter for your business decisions. If you're tracking fixed assets and depreciation, you need separate accounts. If you claim allowable business expenses, your structure should map to those categories.
Do you sell physical goods or services only? If you have products, you need cost-of-goods-sold accounts separate from operating expenses.
What assets do you own? Equipment, vehicles, property—each gets its own account so you can track depreciation and know what you own.

Step 4: Strike the balance between simple and specific. This is where most people stumble. Your chart of accounts should be:

Specific enough to give you useful information (you can answer "where is my money actually going?")
Simple enough that you'll use it correctly day after day

A common mistake is over-engineering. If you create 15 different accounts for stationery, printer ink, paper, pens, envelopes, and sticky notes, you're making data entry harder and getting no real insight. One "Office Supplies" account is usually enough. On the other hand, lumping everything into "General Expenses" tells you nothing. You can't manage what you can't measure.

The rule of thumb: if you'd make a different business decision based on the breakdown, it deserves its own account. If not, combine it.

Step 5: Align with tax reporting. Your expense accounts should match the categories your tax authority expects (in the UK, that means allowable expenses under HMRC rules). This makes tax filing much faster because your accounting reports map directly to your tax return. You're not hunting through a vague "Admin Costs" account at the end of the year—you've already captured the data in the right place.

Step 6: Use sub-accounts for detail without clutter. Sub-accounts (child accounts) let you add granularity without making your main reports unreadable. For example:

Travel (parent account)
- Mileage (sub)
- Rail fares (sub)
- Hotels (sub)
- Flights (sub)

Your P&L shows the "Travel" total, but you can drill down when you need the detail. Clean reports, granular data. (This is where cloud accounting software earns its keep—spreadsheets make this tedious.)

A practical sample chart of accounts

Here's a starting point for a small service business. You'll customise it, but this gives you the shape:

Assets (1000–1999)

1000: Business Current Account
1010: Business Savings Account
1020: Petty Cash
1100: Accounts Receivable
1200: Prepaid Expenses
1500: Computer Equipment
1510: Office Furniture
1600: Accumulated Depreciation

Liabilities (2000–2999)

2000: Accounts Payable
2100: Credit Card
2200: Tax Payable
2300: Loan

Equity (3000–3999)

3000: Owner's Capital
3100: Owner's Drawings
3200: Retained Earnings

Revenue (4000–4999)

4000: Service Income
4100: Interest Received
4200: Other Income

Expenses (5000–6999)

5000: Cost of Sales
6000: Rent
6010: Utilities
6020: Insurance
6030: Office Supplies
6040: Phone and Internet
6050: Travel
6060: Marketing and Advertising
6070: Professional Fees
6080: Software Subscriptions
6090: Bank Charges
6100: Depreciation
6110: Training and Development
6120: Repairs and Maintenance

That's roughly 30 accounts—a sensible size for most small businesses. You can add more as you grow, or consolidate if you find you're maintaining accounts nobody looks at.

Mistakes to avoid

Too many accounts. If your chart has 200 entries, it becomes unmanageable. Every transaction becomes a guessing game about which account to use, inconsistency creeps in, and your reports become useless. Start small and add only when you genuinely need the detail.

Too few accounts. The opposite trap: a chart of accounts with just "Income" and "Expenses" tells you nothing. You need enough structure to understand your business.

Inconsistent naming. If you call one account "Phone and Internet" and later create "Telecommunications," you've now split the same type of expense across two accounts. Pick naming conventions and stick to them.

Not reviewing or updating. Your chart should evolve. Review it at least once a year. Deactivate accounts you don't use, add new ones for new activities, consolidate accounts that turned out too granular.

Mixing personal and business. Keep your business bank account and personal finances separate. If personal expenses bleed into your business accounts, your financial reports are fiction. You won't know whether you're actually profitable, and your tax filing becomes a mess.

Frequently Asked Questions

Q: Can I change my chart of accounts after I've started? A: Yes, but it's easier to get it right at the start. You can deactivate unused accounts, rename accounts, and add new ones as your business grows. Most accounting software lets you do this without losing historical data. That said, restructuring mid-year can complicate year-to-date reporting, so do it thoughtfully.

Q: How many accounts should I have? A: For a small business, 20–40 accounts is typical. You need enough detail to understand your finances and make decisions, but not so many that data entry becomes a guessing game. Most new businesses start around 25–30 and adjust as they grow.

Q: Should I use the numbering system if I'm using accounting software? A: The software doesn't require it, but numbering makes accounts easier to find and maintain consistency. It also makes it simpler to review your chart at a glance. If you ever migrate to different software, a numbered system transfers cleanly.

Q: Do I need separate accounts for each customer or supplier? A: No. Accounts receivable and accounts payable track the totals. Your software's contacts or customers list tracks the individual details (who owes you, who you owe). This keeps your chart of accounts clean.

Q: How do I decide whether to create a sub-account or a separate main account? A: If the detail is something you'd report on separately or make decisions based on, use a sub-account structure. For example, "Travel" with subs for mileage, hotels, flights keeps your high-level P&L clean but gives you detail when you need it. If you never look at the breakdown, combine it into one account.

Q: Should my chart of accounts match my tax filing? A: Broadly, yes. Your expense categories should align with what the tax authority expects (HMRC allowable expenses in the UK, Schedule C categories in the US). This makes tax filing much faster because you're not reclassifying data at year-end.

Q: Can I use the same chart of accounts if I have multiple business entities? A: Each legal entity (separate company, sole trader, partnership) should have its own chart of accounts. This keeps finances clearly separated for reporting and tax purposes. Some accounting platforms let you manage multiple entities in one system, each with its own COA.

Next steps

Start with a template from your accounting software, customise it for your business type and region, and keep it lean enough to use consistently. If you're unsure about structure or tax alignment, a brief consultation with an accountant pays for itself in the hours you won't spend reclassifying transactions later.

A well-structured chart of accounts is the difference between "I know roughly what my business costs" and "I understand exactly where my money goes." It's the foundation for clean bookkeeping, accurate reporting, and stress-free tax filing.