What is a chart of accounts, and how do you build one?
Published
A chart of accounts is the organised list of every account a business uses to classify its transactions. It determines what your reports are capable of showing: no line can appear in the income statement unless an account exists for it.
The equation the structure is built on
Every account belongs to one of five groups, and those groups are the terms of the expanded accounting equation:
Assets = Liabilities + Capital + (Revenue − Expenses) − DrawingsThe bracketed part becomes retained earnings at close. Group ordering in the chart is not arbitrary - it is the ordering of this equation, which is why reports come out correctly sequenced without manual arrangement.
Numbering logic
| Range | Group | Appears in |
|---|---|---|
| 1000-1999 | Assets | Balance sheet |
| 2000-2999 | Liabilities | Balance sheet |
| 3000-3999 | Equity | Balance sheet |
| 4000-4999 | Revenue | Income statement |
| 5000-5999 | Cost of sales | Income statement |
| 6000-6999 | Operating expenses | Income statement |
| 7000-7999 | Other income and expenses | Income statement |
The gap rule: leave room. If your first bank account is 1010 and the second is 1011, there is nowhere sensible for a third. Use 1010, 1020, 1030. Working rule: gaps of 10 between similar accounts, gaps of 100 between sub-groups.
A worked structure for a Saudi trading business
1000 Assets 1100 Current assets 1110 Cash on hand 1120 Banks 1121 Bank - operating account 1122 Bank - savings account 1130 Accounts receivable 1140 Inventory 1150 Input VAT 1160 Prepaid expenses 1170 Employee advances 1200 Fixed assets 1210 Furniture and equipment 1220 Vehicles 1290 Accumulated depreciation (credit balance)2000 Liabilities 2100 Current liabilities 2110 Accounts payable 2120 Output VAT 2130 Accrued salaries 2140 GOSI payable 2150 Zakat / income tax payable 2160 Customer advances 2200 Non-current liabilities 2210 End-of-service benefit provision 2220 Long-term loans3000 Equity 3100 Capital 3200 Retained earnings 3300 Owner's / partner's current account4000 Revenue 4100 Product sales 4200 Service revenue 4900 Sales returns and discounts (debit balance)5000 Cost of sales 5100 Cost of goods sold 5200 Inbound freight6000 Operating expenses 6100 Salaries and wages 6200 Rent 6300 Utilities 6400 Marketing and advertising 6500 Administrative expenses 6600 Depreciation
Accounts Saudi businesses need and routinely forget
| Account | Why it's missed | What happens without it |
|---|---|---|
| Input and output VAT as separate accounts | One account looks simpler | Filing turns from a reconciliation into a guess, and the net payable can't be explained |
| End-of-service benefit provision | No invoice ever arrives for it | The liability accrues silently and lands in full the day a long-serving employee resigns. In Al-Waha's case: SAR 41,600, or 27% of total liabilities |
| GOSI payable | Merged into payroll expense | You can't state what is owed to GOSI at any given moment |
| Owner's / partner's current account | Treated as a personal detail | Personal withdrawals leak into operating expenses and the business looks less profitable than it is |
| Zakat / income tax payable | Only computed annually | No liability is carried during the year, so the figure arrives as a shock at close |
| Customer advances | Recorded as revenue | Revenue recognised before delivery, breaching the accrual basis and inflating profit |
The most common failure: chart bloat
A business opens with 60 accounts and reaches 400 within two years, including "Miscellaneous expenses," "Other expenses," and "General expenses" - three accounts nobody can distinguish. The result is a three-page income statement nobody reads.
The decisive rule: create a new account only if you want that item to appear as its own line in your reports. Every other kind of analysis - by branch, project, employee, or marketing channel - belongs to cost centres or tags.
Chart of accounts vs. cost centres
| Chart of accounts | Cost centres | |
|---|---|---|
| Answers | What was the money spent on? | Where was it spent? |
| Examples | Rent, salaries, marketing | Riyadh branch, Jeddah branch, warehouse |
| Changes the shape of | Financial statements | Management reports |
Wrong: "Riyadh rent," "Jeddah rent," and "Warehouse rent" as three accounts. Right: one rent account (6200) allocated across three cost centres.
The difference is not cosmetic. Under the first approach, opening a fourth branch requires a new account for every expense line - the chart doubles with each expansion. Under the second, you add one cost centre.
How many accounts do you need?
Small service business → 40 - 70 accountsTrading business with stock → 70 - 120 accountsMulti-branch business → 90 - 150 accounts + cost centres
Passing 200 accounts in a small business is a near-certain sign that accounts are doing the job of cost centres.
Frequently asked questions
Can the chart be changed after posting has started?
Adding is easy at any time. Merging or renumbering is harder: it touches historical transactions, comparative reports, and possibly figures already submitted on a return. Time spent on the initial structure saves considerable work later.
Is there a mandatory standard chart of accounts in Saudi Arabia?
No single chart is imposed on commercial businesses generally, but financial statements are prepared under the standards endorsed by SOCPA. The chart's detail is yours to design as long as it produces compliant statements.
Should I delete an account I no longer use?
Not if it carries historical transactions - deactivate it instead. Deleting corrupts comparative reporting for prior years.
How does accumulated depreciation fit in?
It sits in the asset group but carries a credit balance - a contra account. Net book value = cost − accumulated depreciation.