How to Categorize Bank Transactions for UK Micro-Entities

If you run a UK micro-entity limited company, properly categorizing your bank transactions is one of the most important parts of keeping your bookkeeping accurate and making your year-end accounts easier to prepare.

This guide explains the essential expense categories you need to know, how to categorize common transactions, and mistakes to avoid when organizing your business finances.

Why categorization matters

Categorizing your transactions correctly helps you:

• Track where your money goes – See which expenses are highest and where you might save
• Prepare accurate reports – Your Profit & Loss statement needs transactions in the right categories
• Make tax easier – Your accountant needs organized data to file your company tax return
• Stay compliant – Companies House and HMRC require accurate records

Essential expense categories for micro-entities

For UK micro-entity limited companies using cash-basis accounting, you typically need these main categories:

1. Cost of Sales

Direct costs of providing your product or service. Examples:

• Materials and supplies you sell to customers
• Freelancer/contractor costs for client work
• Stock purchases (if you resell products)

2. Office & Admin

Day-to-day running costs. Examples:

• Stationery and office supplies
• Software subscriptions (accounting, productivity tools)
• Bank charges
• Postage and courier fees

3. Marketing & Advertising

Costs to promote your business. Examples:

• Online ads (Google, Facebook, LinkedIn)
• Website hosting and domain names
• Business cards and promotional materials
• Sponsorships

4. Travel & Subsistence

Business travel expenses. Examples:

• Train, bus, or plane tickets for business trips
• Mileage if using your personal car for business
• Parking fees
• Hotels for business trips
• Meals while traveling for business

5. Professional Fees

Payments to professionals who help run your business. Examples:

• Accountant fees
• Legal fees
• Business consultant fees
• Companies House filing fees

6. Premises Costs

If you rent business premises. Examples:

• Rent
• Business rates
• Utilities (electricity, gas, water)
• Building insurance

7. Equipment & Assets

Items you buy to use in your business (not resell). Examples:

• Computers and laptops
• Office furniture
• Tools and machinery
• Camera equipment

8. Insurance

Business insurance policies. Examples:

• Professional indemnity insurance
• Public liability insurance
• Equipment insurance

9. Wages & Salaries

Payments to employees (if you have any). This does NOT include director's salary paid to yourself – that's recorded differently.

Income categories

Your income is usually simpler to categorize:

• Sales/Revenue – Money from customers for your products or services
• Other Income – Bank interest, grants, or other income not from regular sales

Special transactions to watch for

Personal money in/out

If you transfer your own money into the business bank account, this is not income – it's called a "director's loan" or "capital introduced". Similarly, taking money out for personal use isn't an expense – it's a withdrawal or dividend.

VAT (if applicable)

Micro-entities are typically not VAT-registered, so you don't need to worry about splitting VAT out. If you are VAT-registered, categorization becomes more complex and Bridgly might not be suitable for you.

Mixed-use expenses

If you work from home or use your personal phone for business, you can usually claim a percentage of those costs. Your accountant can advise on the allowed percentage.

Common categorization mistakes

1. Confusing personal and business spending – Only expenses "wholly and exclusively" for business count. Your weekly grocery shop doesn't qualify just because you run a food business.
2. Miscategorizing equipment – Expensive items (like laptops) might need special treatment. Check with your accountant about capital allowances.
3. Forgetting to categorize at all – Leaving transactions uncategorized makes year-end a nightmare. Do it regularly (weekly or monthly is ideal).
4. Being too vague – "Miscellaneous" or "General" categories are fine occasionally, but overusing them makes your accounts less useful.

How Bridgly helps with categorization

Manually categorizing hundreds of transactions is time-consuming. That's why Bridgly offers smart categorization suggestions based on the transaction description and your past choices. You review and confirm each suggestion, so you stay in control while saving hours of work.

Next steps

Now that you know the main expense categories, start organizing your transactions:

1. Download your bank statements as CSV files
2. Go through each transaction and assign a category
3. Keep notes on anything unusual or unclear to ask your accountant
4. Do this regularly (monthly is ideal) rather than leaving it all until year-end

If you're unsure about any categories or transactions, always check with your accountant. Proper categorization now saves problems later.

Related reading:

• Getting Started with Bookkeeping for UK Micro-Entities
• Cash-Basis vs Accruals Accounting
• Understanding Micro-Entity Accounts in the UK