Xero for Beginners: Setting Up Your Chart of Accounts

If you’re setting up Xero for the first time, the chart of accounts can look like a long list of unfamiliar labels. It’s tempting to leave everything as it is, or create a new category for every kind of purchase. Neither approach is likely to make your bookkeeping easier.

Your chart of accounts is simply the list of categories used to record your business’s income, expenses, assets and money owed. Get it into shape early and it’ll be easier to understand your reports, keep your records consistent and prepare for tax time.

Here’s a practical way to set it up for a small creative business.

1. Understanding what the chart of accounts does

When you record a transaction in Xero, you choose an account that explains what it was for. A client payment might go to a sales or fees account; a payment for materials might be recorded under materials or production costs.

Those categories make up your chart of accounts. Xero uses them to organise transactions and produce reports, such as your profit and loss report.

It helps to remember that your bank account and your expense category answer different questions:

• Bank account: Where did the money move?

• Chart-of-accounts category: What was the money for?

For example, a payment to a camera hire company comes out of your business bank account, but the transaction might be coded to equipment hire. The right category depends on what the purchase was and how your business records it.

2. Reviewing Xero’s default list

Xero provides a default chart of accounts when you set up an organisation. Treat it as a starting point, not a checklist you must use in full.

Look through the accounts and ask:

• Does this category match something your business actually earns or spends?

• Is there another account that already covers the same thing?

• Would seeing this category separately help you understand your business?

A freelance designer may find broad categories such as sales, software, travel and professional fees useful. A film production company might also want to keep track of production costs, location costs or crew expenses separately. You don’t need a separate account for every client or project, though, unless that extra detail genuinely helps your bookkeeping and reporting.

Xero’s UK setup guidance explains the role of the chart of accounts and the default accounts included in a new organisation.

3. Removing accounts you won’t use

A long list isn’t automatically a useful list. Too many similar categories can make it harder to choose where a transaction belongs, and less clear what your reports are telling you.

Review the accounts you don’t expect to use. If an account has no transactions and you’re sure you won’t need it, you may be able to delete it. If it has a history, archiving it is often the better option. Archived accounts can remain part of your historic records, while being removed from everyday selection.

Before archiving an account, check whether it is used in bank rules, repeating transactions or another part of your bookkeeping process. If you’re unsure, ask your accountant before changing it.

The aim isn’t to make the chart as short as possible at any cost. It’s to keep the list focused on categories you understand and will use consistently.

4. Adding accounts that fit your work

If an important type of income or spending doesn’t fit any existing account, you can add a suitable one. In Xero, the exact menu wording can change, so use the chart-of-accounts area in your organisation and follow the prompts to add an account.

Give each new account:

• A clear name that you’ll recognise when coding a transaction.

• The appropriate account type, such as income, expense, asset or liability.

• A useful code, if your chart uses account codes.

• The right tax rate, where applicable.

Be particularly careful with account type and VAT settings: they can affect how transactions appear in reports and VAT records. Don’t guess if you’re uncertain about the correct treatment.

Creative businesses can have costs that aren’t obvious from a generic list. Depending on your work, you might need categories for materials, props, studio hire, instrument or equipment hire, subcontractors, or travel to a production or client location. Add a category when it helps you understand your business, not simply because one purchase feels unusual.

5. Grouping accounts so reports make sense

Arrange similar things together in a way that feels natural. For example, you might group day-to-day costs such as software, marketing, insurance and professional fees under your operating expenses.

Keep categories separate when the difference is useful. If you regularly pay for both materials and equipment hire, seeing those costs separately may help you understand where money is going. If you only buy a particular item occasionally, a broader category might be clearer.

A good test is whether you can explain each account to someone else in one sentence. If you can’t, the name may be too vague, or the category may not be needed.

Fewer accounts is often easier, not worse. Consistency matters more than having a perfect level of detail. If you record a similar cost in different categories every month, your reports become harder to compare.

6. Setting up your bank accounts before coding transactions

Before you start coding bank transactions, add the business bank accounts and other payment accounts you use. This helps make sure money coming in and going out is recorded against the right account.

If you use a separate account for PayPal, a business card or another payment service, consider how those transactions should be recorded too. Connect a bank feed if it’s available and suits your setup, or follow Xero’s guidance for bringing in transactions another way.

Once transactions appear in Xero, check that you’re matching them to the correct business activity. A transfer between your own business accounts, for example, isn’t the same as income from a client. And a personal purchase paid for from a business account shouldn’t be treated as a business expense just because it appears in the bank feed.

7. Avoiding the common setup snags

A tidy chart of accounts makes routine bookkeeping easier. Watch out for these problems as you start using Xero:

• Creating too many categories: If you have several accounts that mean almost the same thing, it may be difficult to choose between them.

• Coding similar purchases differently: Choose a sensible category and use it consistently.

• Mixing personal and business spending: Keep business purchases separate where possible. If you use a business account for something personal, don’t record it as a business cost.

• Changing categories halfway through the year: This can make reports harder to compare. If a change is needed, ask your accountant how to handle existing transactions and reporting.

• Guessing VAT treatment: Choosing the wrong tax rate can affect your records and returns. Get advice if the transaction isn’t straightforward.

For UK sole traders, HMRC’s guide to expenses explains that you can claim allowable business costs, but not personal spending. It also covers costs with both business and personal use. Limited companies have different rules, so check the guidance that applies to your business structure.

8. Learning more, and getting a review

Xero’s help centre and Learning hub are useful places to explore the software’s features and free learning resources. HMRC’s guidance can help you understand expense rules, but it doesn’t replace advice on how a particular transaction should be recorded in your accounts.

It’s also worth speaking to your accountant before you’ve coded a full year of transactions. A short review of your chart can help you avoid having to untangle inconsistent categories later.

At Creative and Numbers, we help creative businesses get comfortable with software and bookkeeping. You can learn more about our software training for creatives or bookkeeping support.

Keeping your Xero chart simple and useful

Your chart of accounts doesn’t need to capture every tiny detail. It needs to help you record transactions clearly and understand your business reports.

Start with Xero’s default list, remove or archive what you genuinely won’t use, add only the categories your work needs, and set up your bank accounts before coding transactions. Keep the structure consistent, and ask for help when account types, VAT or personal spending make a transaction unclear.

A little care at the start can make your bookkeeping easier to keep up with, leaving more headspace for the work you set out to do.