
Introduction
One of the most common bookkeeping mistakes business owners make is misclassifying expenses, which can lead to inaccurate tax reporting and financial confusion. Understanding the correct way to allocate expenses in Xero can save time, prevent errors, and ensure compliance with HMRC.
Accurate bookkeeping is essential for any business, helping you maintain financial clarity, streamline tax returns, and ensure compliance with HMRC. One of the most common bookkeeping challenges is correctly categorising expenses in Xero. Misallocations can lead to incorrect financial reporting and potential tax inefficiencies.
In this guide, we’ll walk you through how to categorise your business expenses in Xero, helping you make informed financial decisions with confidence.
Why Proper Expense Categorisation Matters
Getting your expense categories right is crucial for several reasons:
- Accurate Financial Reports – Proper categorisation ensures your profit and loss statement reflects the true performance of your business.
- Tax Efficiency – Allocating expenses correctly can help ensure you claim allowable deductions and avoid potential compliance issues.
- Better Business Decisions – Categorised expenses allow you to see where money is being spent, making it easier to budget and forecast.
- Seamless VAT Returns – If you’re VAT-registered, incorrect categorisation can result in under- or over-claimed VAT.
Common Expense Categories in Xero
Below is a table outlining some of the most common business expenses and the relevant Xero account codes. Use this as a reference to ensure your transactions are recorded correctly.
Relevant Account | Example Expenses |
200 – Sales | Revenue from selling products or services |
260 – Other Revenue | Other business income received that is not related to sales such as grants, cashback, referral fee income, commissions etc |
270 – Interest Income | Bank interest earned on business savings accounts or fixed deposits |
310 – Cost of Goods Sold | Goods bought for resale or making your products to sell and costs directly related to the services you provide to clients |
320 – Direct Wages (or Subcontractors if you have this code) | Payments to freelancers or subcontractors |
400 – Advertising | Advertising costs, including social media campaigns, Google Ads, printed brochures, or photography sessions for branding |
401 – Audit and Accountancy Fees | The Orenda Collective fees and any other accounting or bookkeeping fees |
404 – Bank Fees | Bank charges, Stripe fees or other payment systems fees |
408 – Cleaning | Cleaning services or products used specifically for business premises |
412 – Consulting | Coaching fee and consultancy fees |
420 – Entertainment- 100% Business | Meals, drinks and gifts for employees on the payroll (including yourself as a director up to certain limits. More details here https://orendacollective.co.uk/christmas-tax-savings-you-dont-want-to-miss/) |
424 – Entertainment- 0% Business | Meals, drinks and gifts for anyone else such as clients, suppliers, subcontractors or business associates |
429 – General Expenses | Any business cost that does not fit in any other code |
441 – Legal Expenses | Solicitors, ICO fees, trademark applications etc |
445 – Light, Heat and Power | Electricity and gas bills for a business premises (not home) |
450 – Professional Fees | Payments to consultants, or other professional advisors for business services |
461 – Printing & Stationery | Stationery, business cards, flyers etc |
463 – IT Software and Consumables | Software subscription fees for tools like Adobe Creative Cloud, Xero, or Microsoft Office, small IT costs such as cables or keyboards/mice etc. |
465 – Rates | Business rates, council tax, water (for business premises, not home) |
469 – Rent | Rent for office spaces, coworking memberships, or studio hire |
473 – Repairs & Maintenance | Costs of repairing (not improving) business premises or equipment |
477 – Salaries | Salary payments – this should be the exact amount on your monthly payslip |
479 – Employers National Insurance | PAYE payments to HMRC for employee income tax and National Insurance deductions |
480 – Staff Training | CPD courses (online or in person), First Aid courses, supervision required by your professional body, business related books and resources |
482 – Pension Costs | Employer pension contributions made by the company to your private pension (more details here https://orendacollective.co.uk/making-pension-contributions-via-your-limited-company/) |
485 – Subscriptions | Professional memberships related to your trade |
489 – Telephone & Internet | Mobile phones in the company’s name or telephone and internet at business premises |
493 – Travel – National | Business travel expenses, such as train tickets, flights, accommodation and meals only when travelling for business and only when the costs are for employees (otherwise it becomes Entertainment). Mileage claims. |
710 – Office Equipment 720 – Computer Equipment 764 – Plant and Machinery | Larger equipment purchases such as laptops, furniture, equipment (costing £150+ or will last you more than 1 year). Please choose the code that is most relevant for the item in question. |
760 – Motor Vehicles | Business vehicles purchased |
820 – VAT | Payments to HMRC for your VAT liabilities |
830 – Provision for Corporation Tax | Corporation tax payments made to HMRC |
835 – Directors’ Loan Account | Personal expenses, such as groceries or personal shopping, mistakenly paid for using the company bank account. Transfers to your personal account which you don’t want to account for as dividends such as drawing on the loan balances owed to you. Money loaned from you to the business. |
858 – Pensions Payable | Payments to your pension provider for pension owed on employees wages |
900 – Loan | Receipt of a business loan and the related repayments towards the loan |
910 – Hire Purchase Loan | Repayments of a hire purchase loan for business assets |
980 – Owner A Drawings/Dividends | Dividends declared and paid to shareholders from company profits |
Equipment Expensed (the number may vary for this code as it is not a standard account code in Xero. If you do not have this code please contact us to set it up). | Small items of equipment used for business such as IT equipment, camera equipment for photographers, fitness equipment for yoga instructors etc. |
Common Mistakes to Avoid
- Posting VAT payments as an expense – VAT should be recorded as a tax liability, not an expense. For example, recording a £5,000 VAT settlement under ‘Expenses’ instead of ‘VAT’ (820) can lead to an inflated expense report.
- Incorrectly categorising travel and entertainment – Business travel should be separated from entertainment costs. Example: A train ticket for a business trip should be recorded under ‘Travel – National’ (493), but a dinner with a client should be ‘Entertainment – 0% Business’ (424).
- Recording dividends as wages – Dividends (980) should not be posted under salaries (477). For instance, taking a £5,000 dividend and mistakenly categorising it as ‘Salaries’ can cause payroll discrepancies.
Final Tips for Maintaining Accurate Records
- Use Bank Feeds in Xero – Automating transactions reduces errors and saves time.
- Regularly Reconcile Accounts – Set aside time each week or month to review transactions and ensure they are categorised correctly.
- Consult us– If you would prefer to outsource your bookkeeping to us so you can focus on running the business, please get in touch!
By following these guidelines and referring to the expense grid above, you can ensure that your accounts remain accurate and compliant, allowing you to focus on growing your business with confidence.
For more bookkeeping tips or personalised support with Xero, contact us.