Learn what a chart of accounts is, how accounts are organised, and how to choose the correct account when recording business transactions.
What Is a Chart of Accounts?
A chart of accounts is an organised list of the accounts a business uses to record its financial transactions.
Each account represents a particular type of asset, liability, equity, income or expense.
The chart of accounts forms the structure of the general ledger and helps ensure transactions are recorded consistently.
The Five Main Account Categories
1. Assets
Assets are resources controlled by a business that are expected to provide future economic benefits.
Examples include bank accounts, trade receivables, inventory and equipment.
2. Liabilities
Liabilities are obligations owed by the business.
Examples include trade payables, bank loans, VAT payable and accrued expenses.
3. Equity
Equity represents the residual interest in the business after liabilities are deducted from assets.
Examples include owner’s capital, retained earnings and relevant equity reserves.
4. Income
Income accounts record revenue and other income earned by the business.
Examples include sales revenue, service income and interest income.
5. Expenses
Expense accounts record costs recognised in running the business.
Examples include rent, utilities, insurance, wages and advertising.
Example Chart of Accounts
Below is a simplified example for a small UK business. The account codes are illustrative rather than a mandatory UK numbering system.
| Code | Account Name | Category |
|---|---|---|
| 1000 | Business Bank Account | Asset |
| 1100 | Trade Receivables | Asset |
| 1200 | Inventory | Asset |
| 1500 | Office Equipment | Asset |
| 2000 | Trade Payables | Liability |
| 2100 | VAT Control | Liability or Asset |
| 2500 | Bank Loan | Liability |
| 3000 | Owner’s Capital | Equity |
| 4000 | Sales Revenue | Income |
| 5000 | Cost of Sales | Expense |
| 6000 | Rent Expense | Expense |
| 6100 | Electricity Expense | Expense |
| 6200 | Advertising Expense | Expense |
How Does a Chart of Accounts Work?
When a transaction is recorded, the bookkeeper selects the accounts affected by that transaction.
Example 1: Paying Office Rent
A business pays £700 rent from its bank account. Ignore VAT.
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Rent Expense | 700 | – |
| Business Bank Account | – | 700 |
| Total | 700 | 700 |
Rent Expense is an expense account, while the business bank account is an asset account.
Example 2: Buying Office Equipment
A business purchases a computer for £900 and pays from its bank account. Ignore VAT. Assume the computer meets the business’s capitalisation policy.
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Office Equipment | 900 | – |
| Business Bank Account | – | 900 |
| Total | 900 | 900 |
The computer is recorded as an asset, rather than immediately being recognised as an expense, under the stated capitalisation assumption.
Chart of Accounts vs General Ledger
These terms are closely related but have different meanings.
| Chart of Accounts | General Ledger |
|---|---|
| Lists the accounts available | Contains transactions posted to accounts |
| Defines account names and categories | Shows movements and balances |
| Provides the accounting structure | Provides the detailed accounting records |
Chart of Accounts in Xero, QuickBooks and Sage
Xero, QuickBooks and Sage provide a chart of accounts as part of their accounting systems.
Depending on the software, subscription and permissions, users may be able to view, add, edit or archive accounts.
Each system has its own account classifications, default accounts and settings.
Before creating a new account, check whether a suitable account already exists. Unnecessary duplicate accounts can make reports harder to understand.
Common Chart of Accounts Mistakes
- Creating multiple accounts for the same type of expense
- Recording equipment as an expense when it should be capitalised
- Classifying a loan as income
- Mixing personal and business transactions
- Using inconsistent account names or categories
- Changing account classifications without considering their effect on financial reports
Test Your Knowledge
A business receives a £3,000 bank loan into its business bank account.
Which two types of accounts are affected?
Click to reveal the answer
Asset: Business Bank Account increases by £3,000.
Liability: Bank Loan increases by £3,000.
The double-entry journal is:
Debit: Business Bank Account — £3,000
Credit: Bank Loan — £3,000
A loan is not sales revenue. The business has received cash but also has an obligation to repay it.