A chart of accounts is the list of nominal codes every transaction is posted to, grouped so that each code feeds one line of the year end accounts, one box of the tax return and, where relevant, the VAT account. Build it backwards from those outputs: decide which headings the statutory accounts, the Self Assessment or Company Tax Return and the VAT return need, then give each heading a numbered block of codes with room to grow. A short, consistent chart produces clean reports; a long list of overlapping “sundry” codes produces year end journals.

What does a chart of accounts actually have to do?

Every entry in a double entry system is posted to a nominal ledger account, and the chart of accounts is the master list of those accounts. Whatever software is used, the chart decides what the business can report without reworking the figures. If rent and rates share a code, nobody can later split them without going back to the invoices.

For a company, section 386 of the Companies Act 2006 requires accounting records that show and explain the company’s transactions, disclose its financial position with reasonable accuracy at any time, and contain day to day entries of money received and spent with what it was for, plus a record of assets and liabilities. A chart that keeps balance sheet items in their own codes, rather than burying them in expense codes, is what makes “at any time” achievable. Our page on accounting records requirements covers the legal duty in full, and double entry bookkeeping explains the posting mechanics.

How should nominal codes be numbered?

No law prescribes a numbering scheme. The practical rule is that the order of the codes should follow the order of the accounts, so that a trial balance read from top to bottom already looks like a balance sheet followed by a profit and loss account. A common pattern is four digit codes in blocks:

Block Used for Normal balance
0000 to 0999 Fixed assets and their accumulated depreciation Debit (depreciation codes credit)
1000 to 1999 Current assets: stock, trade debtors, prepayments, bank Debit
2000 to 2999 Liabilities: trade creditors, VAT, PAYE, loans, accruals Credit
3000 to 3999 Capital, share capital, reserves, drawings or dividends Credit (drawings and dividends debit)
4000 to 4999 Sales and other income Credit
5000 to 5999 Direct costs (cost of sales) Debit
6000 to 7999 Overheads Debit
8000 to 8999 Depreciation, interest, bank charges, bad debts Debit
9000 to 9999 Suspense and mispostings Should be nil

Leave gaps between codes (4000, 4010, 4020) so that new lines slot into the right place. Use the code name to say exactly what belongs there, and use tracking categories, departments or projects for analysis rather than creating a new code for every customer or job.

How do you map codes to the statutory accounts?

A company’s accounts follow the formats in Schedule 1 to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) or the equivalent large and medium company rules. The Format 1 balance sheet runs from fixed assets (intangible, tangible, investments), through current assets (stocks, debtors split into trade debtors and other debtors, investments, cash at bank and in hand) and prepayments and accrued income, to creditors due within one year, creditors due after more than one year, provisions, accruals and deferred income, and capital and reserves. The Format 1 profit and loss account starts with turnover, cost of sales and gross profit, then distribution costs, administrative expenses, other operating income, interest and tax.

Each nominal code should map to exactly one of those lines. Three points save time at the year end:

  • Cost of sales versus administrative expenses. Put direct costs in their own block so gross profit is right in the management accounts, not just the statutory ones.
  • Tax creditors. The notes to the formats require creditors for taxation and social security to be shown separately within other creditors. Give VAT, PAYE and National Insurance, and Corporation Tax their own liability codes.
  • Directors. Keep a separate code for each director’s loan account rather than posting personal items to an expense or to “other debtors”.

Micro entities filing under FRS 105 use shorter formats, but the same chart works: the detailed codes simply roll up into fewer lines.

How should a sole trader or partnership set up codes?

For an unincorporated business the most useful target is the tax return. The 2025 to 2026 Self Assessment self employment (full) page, SA103F, asks for expenses in boxes 17 to 30: cost of goods bought for resale or goods used; construction industry payments to subcontractors; wages, salaries and other staff costs; car, van and travel; rent, rates, power and insurance; repairs and maintenance; phone, fax, stationery and other office costs; advertising and business entertainment; interest on bank and other loans; bank, credit card and other financial charges; irrecoverable debts written off; accountancy, legal and other professional fees; depreciation and loss or profit on sale of assets; and other business expenses. Boxes 32 to 45 then ask for any disallowable amounts included in each of those figures.

If each overhead code rolls up into one of those boxes, completing the return is a report rather than an analysis exercise. Keep disallowable items on their own codes, for example client entertaining separate from advertising, and private use elements separate from the business share, so the disallowable column can be filled from the ledger. SA103F lets businesses with turnover below £90,000 give a single total for expenses in box 31, but a full analysis is still worth keeping.

The same structure now drives quarterly reporting too. HMRC’s guidance says Making Tax Digital for Income Tax uses the same income and expense categories as Self Assessment, and sole traders and landlords with qualifying income over £50,000 in 2024 to 2025 should have started using it from 6 April 2026, with the threshold falling to £30,000 (based on 2025 to 2026) from 6 April 2027 and £20,000 (based on 2026 to 2027) from 6 April 2028.

How should the chart handle VAT?

VAT Notice 700/21 requires every VAT registered business to keep a VAT account, which it describes as the link or audit trail between the business records and the VAT return. It must record output tax on sales, tax due under the reverse charge, input tax that can be claimed, and adjustments such as error corrections, credits allowed or received and bad debt relief. The cleanest approach is a VAT control code in the liabilities block, with separate codes if needed for reverse charge VAT or bad debt relief, and VAT rate codes in the software applied to each transaction.

Two design points follow. Income codes should separate standard rated, zero rated, exempt and outside the scope sales where the business has more than one kind, because partial exemption and the VAT return boxes depend on them. And because the VAT account is part of the electronic account under Making Tax Digital, any movement of figures between software after they are first entered must be by digital link; HMRC’s notice says manually transferring data between programs is not acceptable. A chart that lets the software produce the return directly avoids that problem. See our guide to Making Tax Digital for VAT.

What does a worked extract look like?

Illustration only. A small limited company that sells and installs equipment might use:

Code Name Feeds
0030 Tools and equipment, cost Tangible fixed assets
0031 Tools and equipment, depreciation Tangible fixed assets
1100 Trade debtors control Debtors: trade debtors
1200 Bank current account Cash at bank and in hand
2100 Trade creditors control Creditors within one year: trade creditors
2200 VAT control Other creditors: taxation and social security
2210 PAYE and NIC Other creditors: taxation and social security
2300 Director’s loan account Other creditors or other debtors
4000 Sales, equipment (standard rated) Turnover
4010 Sales, installation labour Turnover
5000 Equipment purchases Cost of sales
5100 Subcontractor labour Cost of sales
7100 Rent and rates Administrative expenses
7600 Client entertaining Administrative expenses (disallowed for tax)
9999 Suspense Must be cleared before the accounts

What should be in place for the year end?

Codes for accruals, prepayments and deferred income let the accountant post accruals and prepayments without disturbing the expense codes. Control codes for debtors, creditors, VAT, wages and the bank should each be reconcilable to an outside document, and the suspense code should be nil. If those balances are right, the trial balance becomes the draft accounts with very few adjustments. VAT Notice 700/21 says records for VAT should generally be kept for at least six years, so a renamed or merged code should keep its history rather than being deleted.

What mistakes cause the most rework?

  • Too many codes. Hundreds of overhead codes with a handful of postings each make reviews slow and misposting more likely.
  • Catch all codes. “Sundries” or “general expenses” become the largest overhead and have to be analysed at the year end.
  • Capital items in expense codes. Equipment posted to repairs understates fixed assets and loses the record needed for capital allowances.
  • Changing meanings mid year. Reusing a code for something different breaks year on year comparisons.
  • Mixing business and personal. Company payments for a director’s personal costs belong in the loan account, not an expense code.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.