What Should My First Chart of Accounts Look Like

A chart of accounts is the backbone of every accounting system. It determines how financial information is recorded, organised, and reported. For a brand new business the first chart of accounts acts as a blueprint. It shapes how you view performance, manage cash flow, file tax returns, and make financial decisions throughout the year.

Many start ups feel overwhelmed when they first see long lists of codes and categories inside accounting software. The good news is that most new businesses need far fewer accounts than they think. A clean structured chart of accounts saves time, reduces confusion, and makes bookkeeping easier even for someone with little experience. This guide explains what a start up’s first chart of accounts should look like, how it works, how to build one, and the most important categories to include.

What a Chart of Accounts Is and Why It Matters

A chart of accounts is a list of all the categories a business uses to record income, expenses, assets, liabilities, and equity. Think of it as a filing system. Every financial transaction must be placed into one of these categories. A poorly planned chart of accounts leads to messy records, incorrect VAT claims, cash flow confusion, and complicated year end accounts.

A well structured chart of accounts helps a business:

• Track profit accurately

• Claim the right tax deductions

• Understand spending patterns

• Plan budgets

• Prepare for investors or lenders

• Stay organised for HMRC

• Produce clean financial reports

In my opinion the biggest benefit for start ups is clarity. A simple chart of accounts gives the founder a clear financial dashboard without unnecessary detail.

How Start Ups Should Approach Their First Chart of Accounts

Start ups often overcomplicate things. They add dozens of accounts before they have any transactions. This creates duplication and makes it harder to know where to code expenses.

In year one the best approach is simplicity. Most start ups only need a small number of income and expense accounts. More detail can be added later once patterns emerge.

A good chart of accounts for a new business should be:

• Simple

• Logical

• Easy to understand

• Aligned with your industry

• Flexible enough to grow

Accounting software such as Xero, QuickBooks, and FreeAgent provide default charts of accounts. These are a good starting point but often need trimming. Removing irrelevant accounts and adding a few tailored ones creates a system that reflects your actual business.

The Five Main Sections of a Chart of Accounts

Every chart of accounts is built around five key areas. Each has a different purpose and impacts the financial statements differently.

1. Assets

These are resources the business owns that have value. Examples include cash, stock, equipment, money owed to you, and deposits.

2. Liabilities

These are obligations the business owes. Examples include loans, credit cards, VAT owed to HMRC, and money you owe suppliers.

3. Equity

This shows what the business is worth to the owner after assets and liabilities are considered. In limited companies this includes share capital and retained earnings.

4. Income

This includes all the money the business earns from sales, services, or other activities.

5. Expenses

These are the costs needed to run the business. Examples include rent, software subscriptions, travel, equipment, and advertising.

A clean chart of accounts organises these sections clearly so they make sense at a glance.

What a Start Up’s First Chart of Accounts Should Include

Below is a practical and realistic layout suitable for most new UK businesses. It avoids unnecessary complexity and focuses on the categories that matter in year one.

Asset Accounts

Your first chart of accounts should include the most common asset categories. Start with:

Business bank account
Every business needs this. It records all bank transactions and forms the basis of cash flow reporting.

Cash on hand
Useful only if you actually handle cash. Many digital businesses do not need this.

Accounts receivable
This tracks invoices raised but not yet paid. Essential for service businesses.

Stock or inventory
Only relevant if you hold goods for sale.

Prepayments
Covers things paid in advance such as insurance or software.

Equipment and tools
Use this for laptops, machinery, furniture, and other capital assets.

Accumulated depreciation
A technical account used by accountants to spread asset cost over time.

Director loan account or owner drawings
Tracks money put into or taken out of the business by the owner.

In my opinion it is worth setting these up from the start even if they seem unnecessary because asset recording mistakes cause problems at year end.

Liability Accounts

Start ups should include core liability accounts so debts and obligations are recorded correctly.

Accounts payable
For supplier bills you owe but have not yet paid.

VAT liability
Needed if you are VAT registered. This tracks VAT you owe HMRC or refunds due.

PAYE and National Insurance
Required if you run payroll.

Loans or finance agreements
Useful for startup loans, equipment finance, or credit facilities.

Credit cards
Track business credit card spending here.

A clear liability section keeps your business compliant and avoids confusion over what is owed.

Equity Accounts

For sole traders and partnerships this section is simple. For limited companies it is essential.

For sole traders:

• Owner’s drawings

• Owner’s capital introduced

For limited companies:

• Share capital

• Director’s loan account

• Retained earnings

The director’s loan account is especially important because it prevents incorrect withdrawals from being coded as expenses.

Income Accounts

You do not need dozens of income categories in year one. Over detailed income accounts make reporting harder rather than clearer.

Start with:

• Sales

• Service income

• Consultancy income

• Product income

If the business has multiple income streams you can add accounts later. For example:

• Online sales

• Wholesale income

• Subscription income

The aim is for income reporting to be clear and understandable without clutter.

Expense Accounts

Expenses form the largest section of your chart of accounts. A start up should include:

Cost of sales or cost of goods sold
For businesses that buy items to resell or that incur direct project costs.

Advertising and marketing
Includes social media ads, print ads, Google Ads, and promotional materials.

Software and subscriptions
One of the largest modern start up expenses.

Travel
Covers trains, fuel, taxis, hotels, and business mileage.

Motor expenses
Used if you use a vehicle for business.

Telephone and internet
Covers mobile phones, landlines, and broadband.

Rent or workspace
If you work from an office or co working space.

Professional fees
For accountants, lawyers, consultants, and regulatory fees.

Insurance
Such as public liability, professional indemnity, or contents insurance.

Bank charges and interest
Covers fees from banks, payment providers, and finance charges.

Wages and salaries
For employers only.

Pensions
If you run payroll and have auto enrolment duties.

Equipment and tools
For smaller purchases that do not count as capital assets.

Repairs and maintenance
For fixing tools, equipment, or premises.

General admin costs
Covers stationery, postage, office supplies, and miscellaneous items.

You should avoid too many niche categories until you see what you really need. If an account has fewer than five entries a year it probably does not need its own category.

How to Design a Chart of Accounts That Works for Your Business

Keep It Simple

Start with fewer accounts then expand. Over detailed charts confuse new founders.

Follow HMRC categories

Align categories with what HMRC expects. This makes tax returns smoother.

Link it to reporting needs

Think about what you want to track. For example if advertising is a major driver of revenue keep it separate from general marketing spend.

Avoid duplication

Having two accounts that serve the same purpose causes misclassification.

Match the chart to your industry

For example a construction business needs CIS accounts. An online retailer needs stock and merchant fee accounts.

Use accounting software defaults carefully

Defaults are good but often include hundreds of accounts that a start up does not need. Clean them up.

Ask your accountant to review it

A ten minute review at the start can save hours at year end.

Real World Examples

Example 1: Service Based Consultant

A consultant uses a simple chart of accounts with limited invoices and minimal expenses. The chart includes bank, travel, advertising, professional fees, software, and general expenses. This avoids unnecessary complexity and makes reporting clear.

Example 2: E-commerce Start Up

An online retailer needs extra accounts such as stock, merchant fees, Shopify fees, Stripe charges, refunds, and cost of goods sold. The chart is more detailed because the business has more moving parts.

Example 3: Construction Start Up

A tradesperson needs accounts for materials, subcontractors, tools, motor expenses, CIS suffered, CIS withheld, and protective equipment. These accounts reflect the rules of the construction industry.

Example 4: Limited Company With Staff

A business with employees needs payroll accounts including wages, PAYE, National Insurance, pensions, and employer contributions.

The best chart of accounts is always tailored to the needs of the business but built on a simple foundation.

Why A Good Chart of Accounts Saves Time

A well structured chart of accounts saves time because:

• Bookkeeping becomes faster

• Transaction coding becomes consistent

• VAT returns become simpler

• Year end accounts take less time

• Reporting becomes clearer

• Decision making becomes easier

• Errors become less likely

In my opinion a start up should spend at least one hour planning its chart of accounts. That one hour can save dozens of hours across the year.

Common Mistakes Founders Make

• Setting up too many accounts too early

• Coding personal spending into business accounts

• Missing key accounts such as director’s loan

• Mixing cost of sales with expenses

• Creating duplicate accounts with similar names

• Leaving default accounts they never use

• Using vague categories such as miscellaneous too often

Avoiding these ensures clean accurate records that support growth.

Final Thoughts

A first chart of accounts does not need to be complicated. Most start ups thrive with a clean simple list that reflects their core income streams and main expenses. Over time as the business grows the chart can evolve. What matters most is clarity, consistency, and alignment with how the founder wants to understand the business.

In my opinion the best chart of accounts is one that removes stress rather than adds it. It should act as a foundation for bookkeeping not a barrier. With the right setup a start up will find it easier to stay compliant, manage cash flow, and make informed decisions throughout the year.