Setting up a chart of accounts for a Hong Kong SME under HKFRS or SME-FRS
Set up a chart of accounts for a Hong Kong SME that aligns with HKFRS or SME-FRS and supports statutory audit preparation.
Chart of Accounts for a Hong Kong SME Structure and Examples
The chart of accounts is the backbone of a company’s accounting system. For a Hong Kong trading or services SME, its structure must support financial statements prepared under full Hong Kong Financial Reporting Standards (HKFRS) or the SME Financial Reporting Framework and Standard (SME-FRF and SME-FRS). This chart maps directly to the statutory financial statement line items required by the Companies Ordinance (Cap. 622) and the chosen reporting framework. Get the mapping right once, and the trial balance flows into the balance sheet, profit and loss account, and audit trail without manual reclassification.
The Purpose of a Chart of Accounts
A chart of accounts is a numbered list of every account used to record transactions. It organises financial data into the categories that feed the primary financial statements: current assets, non-current assets, current liabilities, equity, revenue, cost of sales, and operating expenses.
For a Hong Kong company, the chart must also support the seven-year record retention requirement under section 373 of the Companies Ordinance. Every transaction posted to an account must be traceable through the accounting records to the underlying source document, an invoice, receipt, or bank statement. That traceability is the foundation of the statutory audit. The auditor’s report confirms whether the financial statements give a true and fair view. It cannot do so if the trail from account balance to source document is broken.
Hong Kong Chart of Accounts Template
Below is a sample chart of accounts for a typical Hong Kong trading or services SME. The numbering convention uses a four-digit code. The first digit signals the financial statement category: 1 for assets, 2 for liabilities, 3 for equity, 4 for revenue, 5 for cost of sales, 6 for operating expenses, 7 for other income and expenses, and 8 for non-operating items. The structure is flexible enough to accommodate the SME-FRS chart of accounts structure, which requires fewer line items than full HKFRS.
| Account Code | Account Name | Category | Financial Statement Line Item |
|---|---|---|---|
| 1000 | Cash at bank | Current assets | Cash and cash equivalents |
| 1100 | Trade receivables | Current assets | Trade and other receivables |
| 1200 | Prepayments and deposits | Current assets | Prepayments and deposits |
| 1300 | Inventory | Current assets | Inventories |
| 1400 | Other current assets | Current assets | Other current assets |
| 1500 | Property, plant and equipment | Non-current assets | Property, plant and equipment |
| 1600 | Right-of-use assets (leases) | Non-current assets | Right-of-use assets |
| 1700 | Intangible assets | Non-current assets | Intangible assets |
| 1800 | Investments | Non-current assets | Investments |
| 2000 | Trade payables | Current liabilities | Trade and other payables |
| 2100 | Accrued expenses | Current liabilities | Accruals and other payables |
| 2200 | Bank borrowings (current portion) | Current liabilities | Borrowings |
| 2300 | Lease liabilities (current portion) | Current liabilities | Lease liabilities |
| 2400 | Taxation payable | Current liabilities | Current tax liabilities |
| 2500 | Other current liabilities | Current liabilities | Other current liabilities |
| 2600 | Bank borrowings (non-current) | Non-current liabilities | Borrowings |
| 2700 | Lease liabilities (non-current) | Non-current liabilities | Lease liabilities |
| 2800 | Deferred tax liabilities | Non-current liabilities | Deferred tax liabilities |
| 3000 | Share capital | Equity | Share capital |
| 3100 | Retained earnings | Equity | Retained earnings |
| 3200 | Other reserves | Equity | Other reserves |
| 4000 | Sales revenue | Revenue | Revenue |
| 4100 | Service revenue | Revenue | Revenue |
| 4200 | Other revenue | Revenue | Other income |
| 5000 | Cost of goods sold | Cost of sales | Cost of sales |
| 5100 | Purchases | Cost of sales | Cost of sales |
| 5200 | Direct labour | Cost of sales | Cost of sales |
| 5300 | Freight and shipping | Cost of sales | Cost of sales |
| 6000 | Salaries and wages | Operating expenses | Employee benefits expense |
| 6100 | Rent and rates | Operating expenses | Operating lease expenses (if not under HKFRS 16) |
| 6200 | Utilities | Operating expenses | Other operating expenses |
| 6300 | Office supplies | Operating expenses | Other operating expenses |
| 6400 | Professional fees | Operating expenses | Other operating expenses |
| 6500 | Depreciation | Operating expenses | Depreciation |
| 6600 | Amortisation | Operating expenses | Amortisation |
| 6700 | Travel and entertainment | Operating expenses | Other operating expenses |
| 6800 | Marketing and advertising | Operating expenses | Other operating expenses |
| 6900 | Bank charges | Operating expenses | Finance costs |
| 7000 | Interest income | Other income | Finance income |
| 7100 | Foreign exchange gains | Other income | Other gains and losses |
| 7200 | Foreign exchange losses | Other expenses | Other gains and losses |
| 8000 | Income tax expense | Non-operating | Income tax expense |
HKFRS Chart of Accounts Structure
Full HKFRS demands more detailed classifications. Financial instruments, leases, and revenue recognition all require granular treatment. A company applying HKFRS 16 Leases must record right-of-use assets and lease liabilities separately from owned assets and other borrowings, the sample chart includes account codes 1600 and 2300 for that purpose.
HKFRS 15 Revenue from Contracts with Customers requires revenue to be disaggregated by nature, timing, and customer type. A trading SME might use account 4000 for product sales and 4100 for service revenue, with sub-accounts for each major customer or contract. The HKFRS chart of accounts structure also requires separate accounts for impairment allowances on trade receivables (account 1100 would carry a sub-account for allowance for doubtful debts) and for deferred tax assets and liabilities (account 2800). The chart must support a balance sheet that distinguishes current from non-current assets and liabilities. It must also support a profit and loss account that shows revenue, cost of sales, gross profit, operating expenses, finance costs, and income tax expense.
SME-FRS Chart of Accounts
Companies qualifying for the reporting exemption under section 359 of the Companies Ordinance use a simpler SME-FRS chart of accounts. The SME-FRF and SME-FRS reduce the number of required disclosures and eliminate complex recognition and measurement requirements. Deferred tax accounting and the detailed lease accounting under HKFRS 16 are not required. The sample chart above is already aligned with SME-FRS, using broad categories like "Property, plant and equipment" and "Trade and other receivables" without sub-classifications for financial assets at fair value or derivative instruments.
A company using SME-FRS still needs accounts for depreciation (account 6500) and amortisation (account 6600). Asset measurement follows the cost model rather than the revaluation model permitted under full HKFRS. The SME-FRS chart of accounts structure omits accounts for deferred tax, hedge accounting, and business combinations, unless the company has such transactions.
Mapping the Chart to Statutory Financial Statements
The chart of accounts must map to the line items required by Schedule 4 to the Companies Ordinance and the chosen framework. For a typical SME, the balance sheet will show:
- Current assets: cash at bank, trade receivables, prepayments, inventory
- Non-current assets: property, plant and equipment, right-of-use assets
- Current liabilities: trade payables, accrued expenses, current portion of borrowings and lease liabilities, taxation payable
- Non-current liabilities: borrowings, lease liabilities
- Equity: share capital, retained earnings
The profit and loss account will show:
- Revenue
- Cost of sales
- Gross profit
- Operating expenses (including depreciation)
- Finance costs
- Income tax expense
- Net profit or loss
The directors’ report and auditor’s report refer to these line items directly. Design the chart so the trial balance maps to the financial statement format without manual reclassification. That reduces the risk of errors. It keeps the audit trail intact.
Supporting the Audit Trail and Record Retention
Every transaction posted to the chart of accounts must be supported by a source document. Keep the accounting records for seven years after the end of the financial year to which they relate, as required by section 373 of the Companies Ordinance. The chart of accounts should include a reference field for the document number, invoice number, receipt number, bank statement reference, so the auditor can trace any balance back to its source. A trade receivable balance in account 1100 should be supported by sales invoices and payment receipts. A depreciation charge in account 6500 should be supported by the fixed asset register and the depreciation policy.
The chart also supports the preparation of management accounts used internally to monitor performance. The statutory accounts must be prepared in accordance with HKFRS or SME-FRS, and the chart of accounts must be consistent with that framework. Post any adjustments required for the statutory audit, accruals, prepayments, or impairment allowances, to the appropriate accounts in the chart.
Practical Considerations for Hong Kong SMEs
When setting up a chart of accounts for a Hong Kong SME:
- Use a consistent numbering convention that allows for future expansion. Leave gaps between account codes (1000, 1100, 1200) so new accounts can be inserted without renumbering.
- Align the chart with the accounting software you use. Most cloud accounting platforms, including Xero and QuickBooks, provide default charts that can be customised for Hong Kong requirements.
- Ensure the chart supports multi-currency transactions if the company trades in foreign currencies. Include account codes for foreign exchange gains and losses (7100 and 7200).
- Review the chart annually with your auditor to confirm it still meets the requirements of the chosen framework and the Companies Ordinance.
A well-designed chart of accounts for a Hong Kong SME is not a one-time exercise. It evolves as the company grows, adds new revenue streams, or changes its reporting framework. The sample provided here is a starting point. Adapt it to the specific needs of a trading or services business.
Sources
More on accounting & bookkeeping.