Definitely start with a rug. I don't know what your style is so can't make specific rug suggestion. But, I would take advantage of this neutral palette to choose a rug with a design and colors I love, then add pillows and accessories repeating those colors. Make sure the rug is large enough to be in scale with the sofa. The sofa has pretty hard lines, you might consider a round ottoman out of fabric. Above the sofa you could do artwork in graphic black and white, or color. Don't worry about everything matching. I am a believer that artwork is chosen because you love the piece. It should stand out in the room if you made the decision to invest in something. Check out local colleges the art department has several sales during the year of student art; especially around this time of year. Once you have the rug and ottoman add some chairs for additional seating. Enjoy and have fun.

to PirateFoxy I have NOT seen sofa bed options but, I have seen their sofas and they are FIRST CLASS all the way. They are upscale product and upscale for a reason. That reason is quality. I would trust an item made by American Leather but, you know its just in the nature of sofa/beds that they are notoriously NOT comfortable so, you might want to work on that "comfort" problem a little more. I know I have wrestled with it as well and finally just bought a "custom made" day bed from an architect/wood fabricator on www.etsy.com. Am waiting for it now! Will look for picture and attache for you and others to see. But, I can recommend American Leather (made in Texas) to everybody.

With a family of five, I think a large corner/modular sofa would be a practical choice and would also work well to help define the two separate spaces in the large living room. All of the fabric nominations look nice, although I'm personally not a huge fan of the one with stripes. I think they all provide a Hamptons feel. If your family has young children, then I would be tempted to go with the most stain resistant and hard wearing of the short-listed fabrics.

Thank you everyone for your great comments. There were design ideas I had never thought of and really valued like the floating shelf, a mural and larger cushions and changing the colour of the lamp shade. Attached is the latest room version. I have moved paintings around. I do love this aboriginal painting, I am not sure if it is a little small but I'd really like it above the couch so perhaps another complimentary painting beside it? Or do you think it works ok? I think I can pretty much choose any colour from the painting for cushions and to brighten up the space - was thinking brighter and larger like suggested above by littlethommo2 and littlethommo2 . I still think I have balance/scale to work on - thank you Paul Di Stefano Design and littlethommo2 . I can move the cupboard at the end of the couch with the plant on it and place something taller here ? Any further ideas are really appreciated. Thank you all !