Understanding the Chart of Accounts for New Businesses

Introduction: Why the Chart of Accounts Matters

A Chart of Accounts (CoA) is the backbone of every accounting system. It provides a logical structure for organizing all financial transactions in a business, acting as a blueprint for how income, expenses, assets, liabilities, and equity are recorded and reported. A clear, well-planned CoA supports financial visibility, simplifies tax reporting, ensures audit readiness, and enables business growth through accurate insights.

As an advisory partner to numerous startups and SMEs across Pakistan and abroad, Usman Rasheed & Co Chartered Accountants regularly guides new businesses in setting up tailored CoAs that align with industry standards and local regulations.

1. What is a Chart of Accounts?

The Chart of Accounts is a master list of all financial accounts a company uses in its accounting system. It structures and organizes financial transactions and is essential for:

• General Ledger Management
• Financial Statement Generation
• Budgeting and Forecasting
• Regulatory and Tax Compliance

Each account in the CoA corresponds to a financial element—like “Cash,” “Salaries,” or “Sales Revenue”—with a unique identifier and categorization.

2. Structure of a Chart of Accounts

The CoA typically consists of five major categories:

1. Assets – What the business owns
2. Liabilities – What the business owes
3. Equity – Owner’s capital and retained earnings
4. Revenue (Income) – Sales and other income
5. Expenses – Operational and administrative costs

Each category can be broken down into subcategories. For example:

• Assets:
  • 1010 – Cash in Hand
  • 1020 – Bank Account – HBL
  • 1030 – Accounts Receivable
• Expenses:
  • 5010 – Salaries & Wages
  • 5020 – Rent Expense
  • 5030 – Utilities

3. Numbering System: Organizing Accounts Logically

A numbering system helps organize the CoA and improves readability. A common system uses ranges:

• 1000–1999: Assets
• 2000–2999: Liabilities
• 3000–3999: Equity
• 4000–4999: Revenue
• 5000–5999: Expenses

This allows easy sorting and facilitates the generation of clean reports. Businesses can also customize numbering to reflect departments or business units.

4. Setting Up a CoA: Step-by-Step for New Businesses

Step 1: Identify your legal structure and reporting needs

For example, sole proprietors will have fewer equity accounts compared to private limited companies.

Step 2: Define tax compliance requirements

Align the CoA with FBR, SECP, and sales tax laws.

Step 3: Choose your accounting platform

Whether you’re using QuickBooks, Zoho Books, or spreadsheets, ensure the software supports a flexible CoA.

Step 4: Categorize and list accounts

Start broad and add detail as needed. Avoid too many granular accounts unless essential.

Step 5: Assign codes and write clear descriptions

Every account should have a name, number, and a brief description.

Step 6: Test your setup

Post a few trial entries to validate how reports look.

Step 7: Map to tax forms and financial statements

Ensure the CoA supports annual return filing and compliance.

5. Examples of Chart of Accounts by Industry

Retail Business:

• 1010 – Cash Register
• 4010 – Sales Revenue
• 6010 – Inventory Shrinkage
• 5020 – Merchant Service Fees

Service Business:

• 1010 – Bank Account
• 4010 – Consulting Revenue
• 5040 – Subcontractor Fees
• 5050 – Professional Liability Insurance

E-Commerce:

• 1030 – Stripe Receivables
• 4010 – Online Sales
• 5040 – Platform Fees (Amazon, Daraz)
• 6020 – Fulfillment Center Expense

Manufacturing:

• 1100 – Raw Materials Inventory
• 1300 – Work-in-Process
• 1400 – Finished Goods
• 5020 – Machine Maintenance

Nonprofit:

• 4010 – Donations (Unrestricted)
• 4020 – Grant Income
• 5030 – Program Expense
• 6010 – Fundraising Costs

6. Common Mistakes New Businesses Make

• Over-customizing too early
• Duplicating similar expense accounts
• Misclassifying capital expenditures as expenses
• Lack of audit trail
• Forgetting FBR-compliant formatting

Avoid these by working with a financial advisor and periodically reviewing your CoA setup.

7. Choosing Accounting Software with CoA Flexibility

When selecting software, look for:

• Custom CoA editing
• Multi-currency support
• Pakistan tax integration (e.g., GST, Withholding Tax)
• Report drill-down functionality
• Audit logs and permission settings

Common tools include:

• QuickBooks Online
• Xero
• Zoho Books
• Wave (for microbusinesses)

8. Integration with Other Business Systems

An effective CoA links with:

• POS systems (cash flow)
• Inventory systems (COGS, stock levels)
• CRM (sales revenue classification)
• Payroll modules (employee costs)
• ERP platforms for large businesses

This integrated setup enables centralized, real-time financial visibility.

9. How CoA Supports Financial Decision-Making

With a strong CoA, businesses can:

• Prepare monthly profit & loss reports
• Monitor spending trends
• Forecast future cash flows
• Identify top-performing products/services
• Track departmental performance

The clearer your CoA, the more powerful your decisions.

10. Compliance and Audit Readiness

A structured CoA ensures:

• Alignment with FBR requirements
• Separation of allowable vs disallowed expenses
• Easier documentation during tax audits
• Clear mapping of financials to SECP returns and bank submissions

11. Maintaining and Updating the Chart of Accounts

• Do review your CoA at least annually
• Don’t delete accounts with transaction history
• Archive rarely used accounts
• Add new accounts as business complexity grows
• Reconcile regularly with external reports

12. Role of Professional Advisory in CoA Design

Working with accounting professionals ensures:

• Compliance with IFRS or local GAAP
• Proper segregation of accounts for internal control
• Tax classification accuracy
• Customized CoA per industry and business model

Firms like Usman Rasheed & Co help startups avoid early-stage accounting pitfalls and future-proof their reporting systems.

Conclusion: Build Your Financial Backbone Right

The chart of accounts is more than a bookkeeping tool—it’s the foundation for tax compliance, strategic planning, and financial transparency. Whether you’re launching an app in Islamabad or exporting garments from Lahore, setting up a robust and scalable CoA is essential for long-term success.

With proper structure and expert guidance, your CoA can be a growth asset—not just a compliance tool.

Need help creating your Chart of Accounts?

Partner with experienced professionals who understand your business, industry, and compliance obligations. A strong start leads to sound financials—and that starts with the right chart of accounts.