What is a chart of accounts (and why do I have 60 of them)?

What a chart of accounts actually is

A chart of accounts is just the master list of categories your business sorts its money into.

That's the whole thing. Every pound that moves through your business — money in, money out — gets dropped into one of these categories so you can later answer simple questions like "how much did we spend on software?" or "how much did we make from consulting?" The chart of accounts is nothing more than the named list of all those categories.

Picture a chest of drawers. Each drawer has a label on the front: Sales, Rent, Software, Travel, Bank, VAT owed to HMRC. Every time money moves, it gets filed into the right drawer. The chart of accounts is just the list of labels on all those drawers. Open the Travel drawer at the end of the month and you can see everything you spent getting places. That's it. No magic, no maths — just tidy filing.

The fancy name makes it sound like a financial instrument. It isn't. It's a filing system with a posh title.

Why you have so many of them

So you log in, look at your settings, and there are sixty of these things. Sixty. You run a small business — surely you don't need sixty categories?

Here's the reassuring truth: you almost certainly didn't create them, and you don't need to understand all of them. A standard chart of accounts comes pre-stocked with drawers for situations any business might run into, so that when one comes up, there's already a sensible place to file it. Most of those sixty drawers will sit politely empty forever. You might only ever use a dozen.

They feel like a lot because the list tries to cover everything in advance: different types of income, every flavour of cost (rent, utilities, insurance, subscriptions, professional fees, bank charges), the things you own (your bank account, equipment, money customers owe you), the things you owe (loans, supplier bills, tax due to HMRC), and the owner's stake in the business. Lay all of that out as separate drawers and sixty stops looking excessive — it's just thorough.

The number isn't a to-do list. It's a well-stocked cupboard. You don't have to fill every drawer; they're just there in case you need them.

The five families the drawers fall into

If you ever want to make sense of the long list, almost every account belongs to one of five families. You don't need to memorise these — but seeing the groups makes the whole thing click.

Income (what you earn). The drawers your sales get filed into — consulting, product sales, that sort of thing.

Expenses (what you spend to run the business). Usually the biggest group of drawers: rent, software, travel, marketing, salaries, bank fees, and so on. This is where most of your day-to-day activity lands.

Assets (what you own). Your bank accounts, equipment, and money customers owe you but haven't paid yet (accounts receivable — money owed to you).

Liabilities (what you owe). Loans, unpaid supplier bills (accounts payable — money owed by you), and tax you owe HMRC like VAT or PAYE.

Equity (the owner's stake). What's left for the owners once you subtract what you owe from what you own.

Notice the pattern: the first two families (income and expenses) are the ones that build your profit and loss statement, and the last three (assets, liabilities, equity) are the ones that build your balance sheet. So the chart of accounts isn't just filing for its own sake — it's the thing that feeds every report you'll ever look at. (See: What is a balance sheet? and What is a P&L?)

A note on "nominal codes" (the numbers you might see)

You may spot numbers next to each account — 4000 Sales, 7500 Rent, that kind of thing. In UK bookkeeping these are called nominal codes (just a reference number for each drawer), and "nominal ledger" is an old-fashioned name for the chart of accounts itself.

Don't let the codes throw you. They're only there so that two accounts with similar names don't get muddled, and so the software can group them tidily — all the 4000s are income, all the 7000s are costs, and so on. You will almost never need to type or remember a nominal code. They're the drawer's serial number, not something you have to learn.

Why it matters that the filing is right

Here's why this dull-sounding list quietly matters: every report you rely on is just a summary of these drawers.

Your profit figure is your income drawers minus your expense drawers. Your VAT return pulls from specific drawers. Your balance sheet is your asset, liability and equity drawers laid out side by side. So when a transaction gets filed in the wrong drawer — a personal lunch landing in Client Entertainment, a piece of equipment dropped into Office Supplies, income misfiled as a loan — every report built on top quietly goes wrong too.

It rarely blows up dramatically. It just means your numbers drift slightly away from the truth, in ways that are hard to spot until someone goes looking. A tidy, correctly-sorted chart of accounts is what makes your reports trustworthy. A messy one is why a founder looks at their own profit figure and thinks "that can't be right" — and they're correct, it isn't, because something got filed in the wrong drawer.

This is also one of the first things an accountant or investor notices. Well-organised accounts where everything sits in a sensible category signal a founder who's on top of the money. A chart of accounts that's been hacked about with a dozen vague "Miscellaneous" drawers signals the opposite.

The honest bit: you shouldn't be sorting these by hand

Now the reassuring part, because the dread here is real and unnecessary.

The fear with a chart of accounts is the sorting: am I putting this transaction in the right drawer? Multiply that by hundreds of transactions a month and it sounds exhausting — and historically it was, because a person had to look at each payment and decide which drawer it belonged in.

That's exactly the work modern accounting software now does for you. A sensible chart of accounts comes set up out of the box, tuned for a business like yours, so you're not staring at a blank cupboard wondering what drawers to build. And as transactions flow in from your bank, the software recognises them and files each one into the right drawer automatically — your usual software subscription into Software, your train fares into Travel, your client payments into Sales. You're not sorting; you're glancing to confirm.

So the genuinely useful thing to know about a chart of accounts is what it is — the labelled drawers your money gets sorted into — and why it matters that the sorting is right. The sorting itself? That's not your job any more. You wouldn't alphabetise your own bank statement by hand. You don't need to hand-file your own transactions either.

The short version

A chart of accounts is just the master list of categories — labelled drawers — that your business sorts its money into. You have so many because a standard list comes pre-stocked to cover anything you might run into, and most of those drawers will stay empty. They fall into five families: income and expenses (which build your profit figure) and assets, liabilities and equity (which build your balance sheet). The numbers you might see are nominal codes, just serial numbers for each drawer — nothing to memorise. It matters because every report you rely on is a summary of these drawers, so filing things in the right one keeps your numbers true. And the sorting that makes it sound like hard work is exactly the part good software now does for you.

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Ready to stop sorting transactions by hand? In Ledgers, your chart of accounts is set up for you from day one, and every transaction from your bank feed is categorised automatically into the right drawer — so your reports stay accurate without you learning a single nominal code. See your numbers without learning accounting → start free.

Want to see what all this sorting adds up to? What is a balance sheet? →

Curious how the auto-sorting actually works? Automatic transaction categorisation, explained →

Frequently asked questions

What is a chart of accounts in simple terms?

It's the master list of categories your business sorts its money into — like labelled drawers. Every transaction gets filed into one, so you can later see how much you earned or spent in each category. Your reports are just summaries of those drawers.

Why does my chart of accounts have so many accounts?

Because a standard chart of accounts comes pre-stocked with categories for situations any business might run into, so there's always a sensible place to file a transaction. Most small businesses only ever use a fraction of them — the rest sit empty, ready just in case.

What are nominal codes?

Nominal codes are the reference numbers you see next to each account (like 4000 for Sales). They exist so similar accounts don't get muddled and so the software can group them tidily. You almost never need to remember or type one.

Do I need to set up my own chart of accounts?

Usually not. Good accounting software provides a sensible chart of accounts out of the box, tuned for a business like yours, and files incoming transactions into the right categories automatically. You mainly just glance to confirm rather than building or sorting by hand.

See your numbers without learning accounting

Ledgers does the bookkeeping — bank feeds, VAT, year-end — and keeps your accountant in the loop. Free for pre-revenue founders.

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