Preparation of accounts is a fundamental process in any business and a legal requirement for tax compliance in Pakistan. Whether for internal financial management or statutory reporting, accurate and timely preparation of accounts ensures better control over finances, supports informed decision-making, and helps avoid penalties from the Federal Board of Revenue (FBR).
Here’s how an accountant would explain the process of preparing accounts for a business in Pakistan, in a structured and easy-to-follow manner.
Record Transactions
Start by maintaining a complete and chronological record of all financial transactions that occur within the business. This includes:
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Sales and purchases (cash or credit)
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Payments to suppliers and expenses
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Receipts from customers and other incomes
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Loans, advances, and repayments
Transactions can be recorded manually in ledgers or journals, but it is recommended to use accounting software such as QuickBooks, Xero, Peachtree, or Wave Accounting for greater accuracy and efficiency. In Pakistan, digital recordkeeping is increasingly encouraged, especially for businesses registered under FBR’s POS or Sales Tax regimes.
Classify Transactions
Once transactions are recorded, classify them into proper accounting heads based on nature. The main categories include:
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Assets (Cash, bank, receivables, property)
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Liabilities (Payables, loans, tax obligations)
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Income (Sales, service income, rental income)
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Expenses (Utilities, rent, salaries, depreciation)
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Capital or Equity (Owner’s investment, retained earnings)
Proper classification ensures that transactions are accurately reflected in financial statements.
Journalize Transactions
The next step is to transfer the classified transactions into the Journal, which records entries in a chronological order. Every transaction is recorded using double-entry accounting, which means each transaction affects at least two accounts.
Here’s an example of journalizing typical transactions:
Example – January Transactions
• Sold goods worth PKR 50,000 on credit
• Purchased goods worth PKR 30,000 on credit
• Paid PKR 10,000 in rent
• Received PKR 15,000 in cash from a customer
Journal Entries:
| Debit | Credit |
|---|---|
| Accounts Receivable PKR 50,000 | Sales PKR 50,000 |
| Purchases PKR 30,000 | Accounts Payable PKR 30,000 |
| Rent Expense PKR 10,000 | Cash PKR 10,000 |
| Cash PKR 15,000 | Accounts Receivable PKR 15,000 |
Post Transactions to Ledger Accounts
Once journal entries are made, post them to the General Ledger. A ledger groups all similar transactions under one account. For example, the Cash Ledger will show all receipts and payments involving cash.
Each ledger account shows the cumulative effect of transactions and their running balances. Maintaining updated ledgers is essential for trial balance preparation and later for the preparation of financial statements like the Balance Sheet and Income Statement.
Prepare Trial Balance
A Trial Balance is prepared to verify that the total debits and credits are equal. This step helps ensure that entries were posted correctly and provides a foundation for financial statement preparation.
Steps to prepare a trial balance:
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List all ledger accounts with their debit or credit balances
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Total the debit and credit sides separately
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Compare totals to ensure they match
Example:
| Ledger Account | Debit Balance | Credit Balance |
|---|---|---|
| Cash | PKR 10,000 | PKR 0 |
| Accounts Receivable | PKR 20,000 | PKR 15,000 |
| Rent Expense | PKR 5,000 | PKR 5,000 |
Totals:
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Total Debit = PKR 35,000
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Total Credit = PKR 20,000
In this case, the trial balance doesn’t balance, indicating that an error exists and must be corrected.
Prepare Financial Statements
Once the trial balance is correct, proceed to prepare the business’s financial statements.
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Income Statement (Profit & Loss Account): Summarizes revenue and expenses to show net profit or loss.
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Balance Sheet (Statement of Financial Position): Displays the company’s assets, liabilities, and equity at a specific date.
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Cash Flow Statement: Shows inflows and outflows of cash over a period (optional for small businesses).
These statements are used for internal management, external reporting, tax filing with FBR, and decision-making by stakeholders.
Additional Best Practices in Pakistan (2025)
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Use of Accounting Software: FBR recommends the use of compliant digital accounting systems that integrate with the IRIS portal and Sales Tax modules.
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Bank Reconciliation: Perform monthly reconciliations of bank statements with your cash/bank ledger to ensure there are no omissions or errors.
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Maintain Tax Records: For tax year 2025, FBR requires taxpayers to maintain all financial and tax-related documents for at least 6 years under Section 174 of the Income Tax Ordinance.
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Hire a Qualified Accountant: It is advisable for companies and large businesses to appoint a CA, ACCA, or ICMA qualified accountant to manage accounts and ensure compliance with Pakistani financial reporting standards.
Compliance with SECP and FBR
If your business is a registered company with the Securities and Exchange Commission of Pakistan (SECP), you must prepare annual audited financial statements in accordance with International Financial Reporting Standards (IFRS). These must be submitted to SECP and FBR within prescribed timelines.
Sole proprietors and partnerships are not subject to SECP requirements but must submit income tax returns and accounts with FBR via IRIS.
