We have a small backyard. I mean it is more than a patio but not much. An addition to this house decreased the yard a great deal but we have made the most of the space.
We knew from the beginning we wanted a large patio for entertaining. Literally half the yard became patio and a fire pit with built in seating. One entire side of the patio is the side of our garage so through potted vines and flowers and a fountain we have turned the big ugly wall into an attractive focal point.
We have three tables and a playhouse on the patio and still have room to move around and add chairs for seating.
My advice is to go big for your seating area. Grass is over rated and it is nice to have a lot of seating space for parties. The built in fire pit can easily seat ten and the ring itself offers additional seating when not in use.
You can still have a play area for the kids but choose the right sized equipment. You may want a swing set with all the bells and whistles but if it is too big then it will look and feel cramped. We chose the smallest wooden swing set available from Walmart and it has been great fun and left us with some yard to play on.
We have kept all trees along the perimeter to make mowing easier and to keep the play space open for the kids.
Living in Southern California this is really an extra room for us. I would say I spend at least two to three hours a day out here not counting the meals we eat out here on the weekends.
Our patio is set with literally a mish mash of tables and chairs my mother in law has passed on to us. Nothing fancy as we are hard on things around here with all the kids and animals. You often find a cat or dog curled up on the patio furniture napping in the sun.