Key takeaways
What this article covers, in order:
- Why categories matter more than people think
- The five buckets everything falls into
- A simple category list for a UK small business
- The tricky ones, and how to handle them
- A worked example
- Habits that keep categories clean
How to categorise bank transactions comes down to deciding what each one was for and putting it in the matching account: income, a type of cost, something you own, something you owe, or money moving between your own accounts. Start with a short list of around 20 categories, be consistent month to month, and only add new ones when a cost is big or frequent enough to be worth watching on its own.
Why categories matter more than people think
Priya runs a cleaning company in Leeds with four staff. Her bank account had 112 transactions last month. Without categories, that's just a long list of numbers. With them, she can see at a glance that cleaning supplies cost £640 last month against £410 the month before, and go and ask why.
Categories are what turn a bank statement into a profit and loss report. They also make your accountant's life easier at year end, which tends to mean a smaller bill for you.
The trap is going the other way: 70 categories, half of them used twice. Nobody can read that report, and you'll never be consistent with it.
The five buckets everything falls into
Before you get to individual categories, every transaction belongs to one of five buckets. Get the bucket right and you're most of the way there.
- Income. Money you earned: sales, fees, interest received.
- Expenses. Money spent running the business that's used up in the period: rent, fuel, software, phone.
- Assets. Things you bought that last and keep their value for a while: a van, a laptop, machinery.
- Liabilities. Money you owe: loans, credit card balances, money owed to suppliers.
- Equity and owner movements. Money the owner puts in or takes out, which isn't income or an expense.
Then there's a sixth thing that isn't really a bucket: transfers between your own accounts. Moving money from current account to savings is neither income nor spending.
A simple category list for a UK small business
Here's a list that suits most service businesses, sole traders and small limited companies. Rename things to match how you talk, delete what you'll never use, and resist adding more until you need them.
| Category | Bucket | Examples |
|---|---|---|
| Sales | Income | Customer payments for your work or products |
| Other income | Income | Bank interest, one-off sales of old equipment |
| Materials and stock | Expense (cost of sales) | Things you buy to resell or use up on jobs |
| Subcontractors | Expense (cost of sales) | Freelancers you pay for client work |
| Staff costs | Expense | Wages and related costs (your accountant or payroll provider supplies the figures) |
| Rent and rates | Expense | Office, unit or workshop rent, business rates |
| Utilities | Expense | Electricity, gas, water for business premises |
| Phone and internet | Expense | Mobile contracts, broadband |
| Software and subscriptions | Expense | Online tools, cloud storage |
| Motor and travel | Expense | Fuel, parking, train tickets, hotels |
| Advertising and marketing | Expense | Online ads, leaflets, website costs |
| Insurance | Expense | Public liability, professional indemnity, van insurance |
| Accountancy and legal | Expense | Accountant's fees, solicitors |
| Bank and card charges | Expense | Monthly account fee, card processing fees |
| Repairs and maintenance | Expense | Fixing equipment or premises |
| Office costs | Expense | Stationery, postage, printer ink |
| Equipment | Asset | Laptops, tools, machinery you'll use for years |
| Loans | Liability | Loan received, loan repayments (the capital part) |
| Owner's money in / out | Equity | Drawings for sole traders; director's loan account for company directors |
| Transfers | Neither | Moves between your own bank and card accounts |
That's 20. Many small businesses never need more than 25.
The tricky ones, and how to handle them
Most transactions are easy. A monthly software subscription is software. It's the same dozen awkward ones that eat your time.
Mixed shopping trips
You go to a supermarket and buy cleaning products for the business and food for home on the same card payment of £84.60. Only the business part is a business cost. If £31.20 was cleaning products, that's £31.20 to materials and £53.40 to the owner's personal account (drawings or director's loan). Better still, pay separately next time.
Equipment versus expense
A £40 drill bit set is an expense. A £1,400 floor scrubber you'll use for five years is equipment. Where exactly the line sits for your business is worth agreeing with your accountant once, then sticking to.
Loan repayments
A £350 monthly loan repayment is usually part capital (reducing what you owe) and part interest (an expense). The lender's statement shows the split. Putting the whole £350 into expenses overstates your costs.
Credit card repayments
When you pay off the business credit card from your current account, that payment is a transfer. The individual purchases on the card are where the real categories go. Categorise both and you'll count everything twice.
Refunds from suppliers
If a supplier refunds you £25, that's not income. It reduces the cost you originally recorded, so it goes back into the same expense category.
Cash withdrawals
Cash out of the business account isn't an expense until it's spent on something. If you're using it for the business, track what it's spent on. If it's for you, it's drawings or director's loan.
A worked example
Here's one week of Priya's business account, categorised:
| Description | Amount | Category |
|---|---|---|
| BACS FROM PARKSIDE DENTAL | +£1,150.00 | Sales |
| BACS FROM HOLT LETTINGS | +£620.00 | Sales |
| CLEANING SUPPLIES DIRECT | −£286.40 | Materials and stock |
| ESSO | −£54.00 | Motor and travel |
| MOBILE NETWORK DD | −£42.00 | Phone and internet |
| TFR TO SAVINGS | −£500.00 | Transfers |
| MONTHLY ACCOUNT FEE | −£8.50 | Bank and card charges |
Income: £1,150.00 + £620.00 = £1,770.00.
Expenses: £286.40 + £54.00 + £42.00 + £8.50 = £390.90.
Profit for the week: £1,770.00 − £390.90 = £1,379.10.
The £500 transfer to savings doesn't touch profit at all. Her current account rose by £1,770.00 − £390.90 − £500.00 = £879.10 over the week, and the other £500 is simply sitting in her savings account. If she'd called that transfer an expense, she'd have understated her profit by £500 for the week.
Habits that keep categories clean
- Categorise weekly, not yearly. You'll remember what "PAYPAL *JS" was on Friday. You won't in eleven months.
- Same supplier, same category. Consistency is what makes month-on-month comparisons mean anything.
- Use the description field. A short note like "replacement mop heads, Parkside job" saves you a phone call later.
- Don't invent a category for a one-off. A £30 one-off cost can live in the nearest sensible category.
- Park, don't guess. If you genuinely don't know what something was, put it somewhere obvious to come back to, rather than burying it in "sundries".
And if you're unsure how something should be treated for your business (equipment thresholds, mixed-use vehicles, staff costs), ask your accountant once and write down their answer.
How HelloBooks helps
In HelloBooks, transactions from your bank feed (you connect your bank through Open Banking) or a CSV statement import land in a review list. You confirm each category or change it, and you can work through them on the mobile app if that's where you have five spare minutes.
On Pro (£14.99 a month), AI auto-categorisation suggests the category for you, so most of the routine lines are already filled in and you're mainly checking. The Free plan comes with some free AI credits to get started. If AI credits run out, AI categorisation pauses and the books carry on working as normal; you just categorise by hand. There's more on how it works on the automated bookkeeping page, and if you're a sole trader, our page for freelancers is worth a look.
FAQs
How many categories should a small business have?
Around 15 to 25 is plenty for most. Add a category only when a cost is big or regular enough that you want to see it separately.
What's the difference between a category and an account?
In bookkeeping software they're usually the same thing. Each category is an account in your chart of accounts, which is what the reports are built from.
Where do I put my own drawings?
For a sole trader, money you take out for yourself is drawings. For a limited company director, it usually goes through a director's loan account unless it's salary or a dividend. Your accountant can confirm which.
Should bank transfers between my accounts be categorised?
Yes, as transfers. They're not income or expenses, and marking them as such keeps your profit figure accurate.
What if I categorised something wrongly months ago?
Change it. Your reports will update. If the period has already been reconciled and locked, or your accountant has used the figures, check with them first.
Pick your list, stick to it, and do a little every week; it's far less painful than it sounds.
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