How to structure a chart of accounts

Why the structure follows the accounts formats

A UK company's balance sheet and profit and loss account must follow one of the formats in Schedule 1 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, and the same format is used in later years unless there are special reasons for a change (SI 2008/409 Schedule 1 Part 1). Small companies have their own Schedule 1 in SI 2008/409.

Balance sheet Format 1 runs from fixed assets through current assets, creditors due within one year, creditors due after more than one year and provisions to capital and reserves. Profit and loss Format 1 runs from turnover and cost of sales through distribution costs and administrative expenses to interest, tax and the profit or loss for the financial year (SI 2008/409 Schedule 1). Numbering accounts in that order means each range adds up to a line in the accounts.

A typical numbering scheme

Range	What it holds	Where it ends up
0000 to 0999	Fixed assets at cost and their accumulated depreciation	Balance sheet, fixed assets (SI 2008/409 Schedule 1)
1000 to 1999	Stock, trade debtors, prepayments, bank and cash	Balance sheet, current assets
2000 to 2999	Trade creditors, accruals, VAT, PAYE, loans, directors' loan account	Balance sheet, creditors
3000 to 3999	Share capital, capital account, drawings, retained profit	Balance sheet, capital and reserves
4000 to 4999	Sales and other income	Profit and loss, turnover and other income
5000 to 5999	Purchases, direct labour, subcontractors	Profit and loss, cost of sales
6000 to 8999	Overheads such as rent, wages, motor, professional fees, depreciation	Profit and loss, expenses
9999	Suspense	Cleared to nil before the accounts are drawn up

Rules that keep a chart usable

Leave gaps in the numbering so new accounts fit in the right place without renumbering.
Keep cost and accumulated depreciation in separate accounts for each class of fixed asset, so the fixed asset note and the depreciation charge can be read straight from the ledger.
Give each control account (trade debtors, trade creditors, VAT, PAYE and National Insurance, net wages) its own code, and post to it only through the sales, purchase, VAT and payroll routines.
Separate costs that are treated differently for tax: client entertaining, depreciation, fines and capital items. Capital allowances replace depreciation, which is not normally deductible (HMRC Capital Allowances Manual CA10020).
Keep a directors' loan account for each director, so overdrawn balances and the disclosure note can be produced director by director.
Archive accounts that are no longer used once their balance is nil. Deleting an account with history breaks earlier reports.
Use the same chart across clients where possible, so staff, review checklists and reports work the same way for every set of books.

Sole traders and partnerships

An unincorporated business has a capital account and drawings in place of share capital and dividends, and its expenses are reported on the self-employment pages of the tax return. GOV.UK groups allowable expenses into headings such as office costs, travel, clothing, staff, goods for resale, financial costs, premises, advertising, subscriptions and training (GOV.UK: expenses if you're self-employed). Grouping the overhead accounts under the expense boxes of the SA103F full self-employment pages lets the return be completed from the trial balance.

Under Making Tax Digital for Income Tax, quarterly updates use HMRC's own categories. A chart that maps each expense account to one of those categories avoids recoding at the quarter end. See the agents' Making Tax Digital for Income Tax guide.

Questions

Can a chart of accounts be changed partway through a year?

Accounts can be added or renamed at any time. Moving balances from one account to another is done by journal, so the audit trail shows the reclassification. Changing the meaning of an existing code partway through a year makes comparisons with earlier months unreliable.

How detailed should a chart be?

Detailed enough to produce the statutory accounts, the tax computation and the VAT return without analysis outside the books, and to give the owner the management figures they ask for. Accounts that hold a few small entries a year can usually be combined.

Does a VAT-registered business need separate VAT accounts?

One VAT control account is enough for the return itself, because each transaction carries a VAT code. Separate accounts for VAT on sales and VAT on purchases make the reconciliation to the return easier. The VAT account forms part of the business's digital records (HMRC VAT Notice 700/21).

In Accountin

In Accountin each client has its own chart of accounts: the company chart numbered by balance sheet and profit and loss ranges, or a sole trader chart grouped under the SA103F boxes, with accounts added, renamed or archived from the Chart tab.