Chart of Account (COA) structure is the heart of an ERP
implementation enabling business to exercise its day to day operations. This
has very influence on how an organization wants to record monetary, contingent
and statistical impact of different transactions taking place across the line
of businesses, report it out to external entities to fulfil regulatory and
statutory requirements, leverage it internally to gain insight on performance
of different departments on both top and bottom lines. In order to be able to
embark efficiently on these essentially require a modern chart of account
mapped to different business modalities and dimensions that does not only takes
care regular requirements as said but helps facilitate automation, rein in need
of creating duplicate segment value pool, one segment does not override others
i.e. maintains uniqueness of purpose mapped to each segment etc. Investing
enough to lay down the foundation of COA structure would be the first step to
lock down a successful ERP implementation and to drive innovation for
businesses throughout the life of application. Note: Combination of segments
(e.g. Company, Department/Cost Centre, Account etc.) forms a Chart of Account.
There are numerous essential characteristics including, but not limited
to, below 5 that must be considered while designing COA structure:
Selection of business modalities/dimensions as segments of COA:
The selection of modalities as segments is not an objective matter but a
very subjective in nature. While some are mandatory one irrespective of
everything and anything but some are invariably vary based on types of
industries, organizations and products or services offered, geographies where
businesses have its operations, internal and external reporting needs, future
considerations and volume of inter or intra company transactions etc. Each one
of these are key drivers to design an idealistic, futuristic and holistic chart
of account. For an example, manufacturing organizations may want to consider
cost type as a segment to represent say fixed and variable cost in order to
better assess contribution margin at the product level. They may look at a
segment exposing sales destination location of a product to clearly articulate
the strategy for multi-fold growth in determined geographies. In banking
industry, companies may choose to introduce reference to a relationship
manager/cost centre in order to measure performance at product portfolio level.
In retail industry, looking at product categories instead of individual product
can be the favourable option.
One segment should not override or make other ones redundant:
This is one of the vital discussion points while designing a COA
structure in any ERP systems. While a thought leadership on this can offer long
term benefits to organizations in account of easier maintenance, minimal master
value pool for each segment, no duplication etc. On the other hand immature
decisions, however, may erode the benefits eventually. A COA structure and
value set for each segment should intelligently be designed in such a way that
one segment does not make other one redundant, does not enforce introduction of
similar type of values for a segment and most importantly they must be
structured "relative" to each other. To understand it better, let's take an
example of a COA structure that has 4 segments called Company, Cost
Centre/Department, Natural account and Sub-Account. There are 3 companies
COMP1, COMP2 and COMP3 and each company operates with its 4 own departments as Sales,
IT, Purchase and Inventory. As a strategic and sustainable approach, a) one
would recommend only 4 different cost centre value sets representing each of
the 4 departments. These 4 can be associated with either of the 3 companies
while actual transactions are taking place. On the other side as a poor design,
b) organization can undoubtedly be enforced to introduce 12 different cost
centre codes representing 4 departments working for 3 different companies. It
is self-evident that option "a" firstly cascades the behaviour of relativity
where Cost Centre is relative to a company and thereby does not lead to a
redundancy and secondly avoids creation of duplicate codes for similar type of
departments. This can further be well understood with postal code numbering
system where it navigates through State, District and finally City. Here City
is relative to a District and a District itself relative to a State for a given
country. In regards to option "b", shortcomings are clearly countable as
creation of duplicate codes while departments are of similar nature for each
company, can't share segment values, certain to experience huge volume of cost
centre values over the period of time etc.
Automation for Intra/Inter Company Transactions:
Organizations like GE who has leading business presence almost all over
the world deal with huge volume of transactions b/t two or more internal
business units. Transactions taking place b/t 2 business units ideally lead to
inter/intra company transactions and that is where it is essential to consider
a placeholder for inter/intra company segment in the COA in order to
efficiently track referencing inter/intra company and enable opportunities for
automation. ERPs like Oracle Application R12/Fusion Cloud offers an automation
to create inter/intra company accounting entries by introducing pre-configured
rules. For example, Oracle Fusion Financials automatically creates Intercompany
Payable accounting entry corresponding to the Intercompany Receivable
inter/intra company accounting entry by looking at the rules. Such entries have
a counterparty reference in the COA code combination as in company (balancing
segment) and designated inter/intra company segment.
Give meaning to each digit/character within a segment rather
than just treat as code:
While a business meaning is tagged to each segment, a COA design can
further be advanced by injecting an appropriate meaning to digits or characters
within a segment. For example instead of just coding a company as COMP1 with no
meaning to individual or set of characters, one can strongly advocate for
"013060" where first 2 digits represents Country, next 2 region and last 2
State. Such logical combination may take away the need of an individual segment
in a COA to signify location. This is additionally very helpful for easy
reference.
Business Rules With Valid COA Code Combinations:
In regular business practice while creating different transactions,
allowing only valid COA code combinations is usually the core business
requirements. For example, although a COA code combination with Cash Account
does not require any specific product code however the same would be needed
while booking revenue. Thus, identification of such scenarios and implementing
rules accordingly in the system is the key to rein in undesired code
combination values.