How to Design a Chart of Accounts for IFRS Reports

What is a chart of accounts, really?

If you are searching for how to design a chart of accounts, start with this: the chart is not a list of labels copied from accounting software. It is the map that tells every transaction where to land in the [general ledger](/glossary#general-ledger). A good [chart of accounts](/glossary#chart-of-accounts) lets a junior accountant post consistently, lets managers read reports without opening every invoice, and lets reviewers trace a balance without guessing what the account name means.

Think of it as the filing system behind the whole [accounting cycle](/learn/accounting-cycle-steps). When the filing system is clear, the work feels simple: sales go to revenue, supplier bills go to payables and expenses, assets stay separate from repairs, and VAT does not disappear inside one vague account. When the filing system is messy, even correct transactions become hard to review.

The goal is not to create the most detailed chart possible. The goal is to create the smallest chart that can answer the business questions you actually need to answer. Can we see gross margin by product group? Can we separate refundable VAT from VAT payable? Can we close the month without asking what “miscellaneous expense” contains? If the answer is yes, the chart is probably doing its job.

How to design a chart of accounts from reports backwards

The cleanest method is to start with the reports, then work backward into accounts. Ask what the [balance sheet](/learn/balance-sheet-guide), income report, VAT return, management pack, and month-end review need to show. Only then decide which accounts deserve their own code.

For example, the statement of financial position needs assets, liabilities, and equity grouped in a way that readers understand. The income report needs revenue, cost of goods sold, and operating expenses separated enough to explain performance. If you already understand how the [income statement](/learn/income-statement-explained) works, the chart should feel like the detailed source behind those line items, not a second unrelated structure.

Then connect the chart to the [trial balance](/glossary#trial-balance). Every account in the chart should roll up cleanly into one trial balance line, and every trial balance line should have a reporting destination. If an account cannot be explained in one sentence, it is probably too vague. If two accounts have almost the same sentence, they are probably duplicates.

A useful design question is: “What decision would improve if this account existed?” If the answer is only “someone might ask one day,” use a dimension, tag, cost center, customer, project, or memo field instead. Accounts should describe accounting nature. Dimensions should describe business context.

How to design a chart of accounts numbering system that can grow

Most charts use number ranges because numbers sort better than names and leave room for growth. The exact numbering system is not fixed by IFRS. What matters is that the pattern is predictable and that new accounts can be added without renumbering old ones.

A simple five-range chart for a small or medium business can look like this:

Leave gaps. Use 1010, 1020, and 1030 instead of 1001, 1002, and 1003. The gap feels unnecessary on day one, but it is valuable when the company opens a second bank account, adds a new VAT clearing account, or separates direct labor from subcontractor cost. A chart that cannot grow quietly will grow loudly through duplicate names and emergency fixes.

For larger businesses, add segments after the natural account: company, branch, department, product line, or project. The natural account says “what kind of thing is this?” The segment says “where did it happen?” Keeping those two ideas separate prevents a common chart explosion.

Worked example 1: Riyadh retailer with VAT and departments

Najd Outdoor Supplies sells camping equipment through a Riyadh showroom and an online store. Management wants three things from the chart: gross margin, VAT control, and expense comparison between showroom and online operations.

The business should not create separate accounts for every possible combination, such as “showroom tent sales,” “online tent sales,” “showroom rent,” and “online rent.” That creates too many accounts and makes posting inconsistent. A cleaner design uses natural accounts plus a department segment.

Now assume the showroom sells goods for SAR 100,000 plus SAR 15,000 VAT, and the related inventory cost is SAR 62,000. The chart supports the posting without creating special one-time accounts. Revenue goes to 4100 with department 01. Output VAT goes to 2150. Cost of sales goes to 5100 with department 01. Inventory decreases through 1160.

The accounting report can now answer two questions separately. The natural accounts show total sales, VAT, cost of sales, and inventory. The department segment shows whether the showroom or online channel produced the margin. That is the difference between a chart designed for reporting and a chart designed by guessing account names during posting.

Worked example 2: Project tracking without account clutter

Eastern Advisory Services provides consulting projects for Gulf clients. It receives a SAR 180,000 annual retainer from Al-Manar Foods on January 1. The service will be delivered evenly over twelve months. The accountant needs to record the receipt, recognize monthly revenue, and track profitability by client project.

The wrong chart creates accounts such as “Al-Manar revenue,” “Al-Manar unearned revenue,” and “Al-Manar subcontractor expense.” That works for one client and collapses at twenty clients. The better chart keeps the accounting nature in the account and the client/project in a dimension.

The first [journal entry](/glossary#journal-entry) debits bank for SAR 180,000 and credits unearned service revenue for SAR 180,000 using the Al-Manar project code. Each month, the accountant debits unearned service revenue for SAR 15,000 and credits advisory service revenue for SAR 15,000 with the same project code.

This design keeps the financial statements clean and still gives management project profitability. The liability remains one liability account. Revenue remains one revenue account. The project code answers the management question without damaging the chart. This is especially important in service firms, where clients, contracts, employees, and departments change faster than financial statement line items.

How should the chart map to IFRS and Saudi records?

A chart of accounts is an internal tool, not an IFRS standard. IFRS does not hand you a mandatory list of account numbers. But the chart should still respect IFRS reporting logic because it feeds the financial statements.

Under IAS 1, companies present a complete set of financial statements: financial position, profit or loss and other comprehensive income, changes in equity, cash flows, and notes. IFRS 18 has been issued and replaces IAS 1 for annual reporting periods beginning on or after January 1, 2027, with more structure around the statement of profit or loss. The practical lesson is the same: do not bury different economic items in one account just because posting is faster today.

For Saudi businesses, the chart also needs VAT and invoice discipline. ZATCA e-invoicing requires electronic invoices in structured format and distinguishes tax invoices from simplified tax invoices. Your chart will not create compliance by itself, but it should make compliance easier. Keep output VAT, input VAT, VAT adjustments, and VAT settlement accounts separate enough that the VAT return can be reviewed without rebuilding it from invoice lines.

The best chart sits between three worlds: IFRS presentation, tax and ZATCA evidence, and management reporting. If it only serves one of those worlds, the accountant will rebuild the other two in spreadsheets during close. That is usually the sign that the chart was under-designed.

Common mistakes that make a chart of accounts hard to use

1. Creating an account for every detail A separate account for each customer, employee, project, branch, or product makes the chart look detailed but weakens control. Use subledgers and dimensions for business detail. Use accounts for accounting nature.

2. Using vague account names “Other expense,” “miscellaneous,” and “general cost” become hiding places. If you need one temporary account, define exactly what goes there and review it every month.

3. Mixing VAT into revenue or expenses VAT collected from customers is not revenue. Recoverable VAT on purchases is not usually an expense. Separate VAT control accounts make reviews, returns, and corrections easier.

4. Deleting or renaming active accounts too quickly If an account has history, changing it can confuse comparisons. It is usually better to deactivate it for new postings and keep its old balances readable.

5. Designing from software defaults only Software templates are useful, but they are not your business model. A restaurant, consulting firm, construction contractor, and e-commerce retailer need different reporting detail.

6. Ignoring month-end close Ask whether the chart helps with accruals, prepaid expenses, depreciation, VAT settlement, and review notes. If every close requires manual regrouping, the chart is not supporting the work.

Practice designing accounts before you touch live books

A strong chart of accounts is easier to build in practice than in theory. Try taking five transactions and asking where each one would land. If the answer is unclear, the account name or structure needs work.

Use these practice prompts:

• A Jeddah retailer buys inventory for SAR 80,000 plus VAT and pays half now.
• A Dammam service firm receives SAR 60,000 before doing the work.
• A Riyadh company pays SAR 24,000 for one year of insurance in advance.
• A branch manager wants marketing expense by city without creating three marketing accounts.
• The accountant needs to separate input VAT, output VAT, and VAT paid to ZATCA.

For each prompt, write the account codes you would need, then explain why each one exists. If two accounts do the same job, merge them. If one account answers too many different questions, split it.

Accountery practice exercises help you test this judgment safely. Start with journal entries, then move into trial balance and close scenarios. The more transactions you post, the easier it becomes to see whether a chart is clear, too thin, or overloaded before real users depend on it.