What Is a Chart of Accounts and Why Does It Matter?
A chart of accounts (COA) is the backbone of your business accounting system. It is an organized list of every account your business uses to record financial transactions, grouped into logical categories. Without a well-structured COA, your financial reports will be unreliable, tax filing becomes a nightmare, and you lose visibility into where your money is going.
For Kenyan SMEs, getting the COA right from the start is especially important. The Kenya Revenue Authority (KRA) expects your books to align with recognized accounting standards, and a clean COA makes it far easier to prepare iTax returns, generate management reports, and satisfy audit requirements.
The Five Standard Account Categories
Every chart of accounts is built on five fundamental categories. These categories form the structure of your balance sheet and income statement, and every transaction your business records will ultimately land in one of them.
- 1Assets (1000-1999): What your business owns, including cash, bank accounts, inventory, equipment, and receivables.
- 2Liabilities (2000-2999): What your business owes, such as loans, accounts payable, taxes payable, and accrued expenses.
- 3Equity (3000-3999): The owner's stake in the business, including capital contributions, retained earnings, and drawings.
- 4Revenue (4000-4999): Income earned from your core business activities, including sales, service income, and other operating revenue.
- 5Expenses (5000-5999): Costs incurred to run the business, from rent and salaries to marketing and utilities.
Recommended Numbering System for Kenyan SMEs
A consistent numbering system makes it easy to find accounts, add new ones, and maintain order as your business grows. The four-digit system shown above is the most common approach for small and medium businesses. Leave gaps between account numbers so you can insert new accounts later without reorganizing the entire structure.
For example, if your bank accounts start at 1100, you might assign 1100 to your main business account, 1110 to a savings account, and 1120 to your M-Pesa business till. This leaves room to add more bank accounts in the future without disrupting the sequence.
Common Accounts for Kenyan SMEs
Below is a reference table of accounts that most Kenyan small businesses will need. You can adjust this list based on your industry and business model, but these accounts cover the majority of transactions a typical SME handles.
| Account Number | Account Name | Category | Notes |
|---|---|---|---|
| 1000 | Petty Cash | Asset | Physical cash on hand |
| 1100 | Main Bank Account | Asset | Primary business bank account |
| 1120 | M-Pesa Business Till | Asset | Safaricom M-Pesa till account |
| 1200 | Accounts Receivable | Asset | Money owed by customers |
| 1300 | Inventory | Asset | Goods held for sale |
| 1500 | Office Equipment | Asset | Computers, furniture, fixtures |
| 2000 | Accounts Payable | Liability | Money owed to suppliers |
| 2100 | VAT Payable | Liability | VAT collected but not yet remitted to KRA |
| 2200 | PAYE Payable | Liability | Employee income tax deductions |
| 2300 | NSSF Payable | Liability | National Social Security Fund contributions |
| 2310 | SHA Payable | Liability | Social Health Authority (SHA) contributions |
| 2320 | Housing Levy Payable | Liability | Affordable Housing Levy deductions |
| 2400 | Loan Payable | Liability | Outstanding business loans |
| 3000 | Owner's Capital | Equity | Initial and additional capital contributions |
| 3100 | Retained Earnings | Equity | Accumulated profits from prior periods |
| 4000 | Sales Revenue | Revenue | Income from sale of goods or services |
| 4100 | Service Income | Revenue | Revenue from professional services rendered |
| 5000 | Cost of Goods Sold | Expense | Direct cost of products sold |
| 5100 | Salaries and Wages | Expense | Employee compensation |
| 5200 | Rent Expense | Expense | Office or shop rent |
| 5300 | Utilities | Expense | Electricity, water, internet |
| 5400 | Marketing Expense | Expense | Advertising and promotion costs |
| 5500 | Bank Charges | Expense | Transaction fees, M-Pesa charges |
| 5600 | Depreciation | Expense | Asset depreciation for the period |
Kenya-Specific Accounts You Should Not Overlook
Kenyan businesses have statutory obligations that require dedicated accounts in your COA. Failing to track these separately is one of the most common mistakes SMEs make, and it leads to costly errors during tax season.
- VAT Input and Output accounts: Track VAT you pay on purchases separately from VAT you collect on sales. This makes filing your monthly VAT return on iTax much easier.
- Withholding Tax account: If you deduct WHT from supplier payments, you need an account to track these deductions before remitting them to KRA.
- Statutory deductions: PAYE, NSSF, SHA, and the Affordable Housing Levy each need their own liability account to ensure accurate payroll processing.
- M-Pesa and mobile money accounts: With M-Pesa being a primary payment channel for many Kenyan businesses, treat your till or paybill as a separate bank account in your COA.
Tips for Maintaining Your Chart of Accounts
- Keep it simple: Start with only the accounts you need. You can always add more as your business grows, but removing unused accounts is harder.
- Review quarterly: Check for accounts with zero balances that can be consolidated, and add new accounts when you notice transactions being lumped into catch-all categories.
- Be consistent: Once you assign a transaction type to an account, always use the same account. Inconsistency makes your financial reports meaningless over time.
- Align with your tax returns: Structure your revenue and expense accounts so they map directly to the categories on your KRA income tax return.
A well-organized chart of accounts is the foundation of reliable financial reporting. Invest time in setting it up correctly from the beginning, and you will save countless hours during tax filing, audits, and business planning.
