COA Desing - Considertions & Factors

Design of COAstructure is a critical process for two reasons. First, it affects all the departments within the organization & second, it's configuration which cannot be revisited on a later date. Following are some important factors which should be considered  :-

Legal Entities - When a business group is operating though more than one legal entity, it requires having at-least one trial balance per legal entity.

· Budgeting - The level of budgeting done in an organization provides a guideline to prepare the company, cost centre & natural account segments.

· Company Locations - In cases where the organizations operate from more than one location say through sales offices, factories, subsidiaries etc, it may be helpful to record the location where a particular financial transaction occurred.

· Supplier/Customer Locations - Organizations which need to analyze the financial information based on the supplier’s or customer’s location may require a location segment dedicated to this.

· SBU - Sub Business Unit or Operating Unit or Line of Business has been introduced more & more in modern chart of accounts consequent to diversification of services & globalization of operations.

· Departments / Cost Centre - Almost all charts of accounts have a segment for cost centre.

· Products - Some organizations deal in products which are low in volume but high in value. Mostly these organizations would like to analyze their costs & revenue for individual products.

· Projects - Certain organizations have their business models build around project activities.

· Modules - Number of modules to cater to individual needs of various organizations & functions within.

· Reports - The reports required by an organization can broadly be divided into two parts. Firstly, the reports that are mandated by law & secondly, the reports required by management for analysis & decision making. .

· Intercompany - In cases where the organization operates through more than one company/division, there are intercompany transactions generated in the course of business.

Best practices and sample COA structure developments

COA may not be standardized for any Industry because it can be changed with different need / desire of management, but it could be generalize to some extend :-

Manufacturing/ServicesCompany - Cost Centre - Product Line - Account - Sub Account - Future1

DistributionDivision - Region - Distribution - Account - Future1

ProjectsCompany - Department - Account - Project Type - Project - Future1

Retail
Company - Profit Center - Location - Account - Employee - Future1
Telecom
Company  - Region - office - Cost Centre - Future-01 - Natural Account - Business Unit - Product

NGO
Company - Fund - Stratagy - Budget Center - Natural Account - Future1

Process Manufacturing
Management Code - Account - Cost Center - Base/Variable - Location - Product - Future1

Transporatation
Company - Account - Cost Center - Product Line  - Product Type  - Contract Type - Project  - Customer -Future1

 Power Company
 Legal Entity  - Account - Function - Analytical - Mgment Entity - InterCompany - Local  - Future1

Service Company
Company - Division - Location - SDO/CC - Cost Center - Process/Product - Account - Sub Account - Base - Folder - Future1

Real Estates
Legal Entity - Center - Account - Analysis - Future 1

Banking
Legal Entity - Business Unit - Account - Product Code - Rel.Ship Center - Location - Intra Group Movement - Currency - Future1

Features of a mature & most efficient COA

COA finalization is a milestone in any implementation and every organization is reinventing the wheel in designing most efficient COA. Designing an accounting flexfield is one of the most difficult processes in an implementation & a “good” chart of accounts has the following criteria:

1. Simple to understand - segments support important aspects of the business.
2.  Minimum segments Maximum information - able to report on critical business components with standard reports without resorting to spreadsheets.
3. Expandable i.e. enough room to expand within each segment.
4. Numbers only – not alphanumeric
5. One for all
6. Less dependency of one segment on another
7. Only one type of information in each segment.

COA - ERP Systems

ERP manages to achieve accounting requirements by having different segments and combining them into a COA Structure. The Chart of Accounts (COA) is an account structure composed of various dimensions capturing relevant information related to underlying transaction. This structure helps in capturing appropriate level of details while recording transactions which helps in deriving the financial account balances at the desired segment level.
A typical structure in ERP will have segments like below:

• Legal Entity – Capturing the Company Information
• Cost Center – Capturing Department or Cost Center Information
• Natural Account – Synonym with the tradition account and captures Asset, Liability, Income or Expense
• Sub – Account – Captures granular details of the Natural Account

ERP is the importance of the account type - while defining the Natural Account; the Natural Account value must have only one Account Type. The valid account types are primarily four – Asset, Liabilities, Income and Expense and some packages may include Share Holder Equity as another classification. Defining an account type as Income or Expense tells to the system that this is a revenue account and the opening balance of this account must be zero at the beginning of the financial year

Recording transactions in ERP Systems

The traditional way of recording transactions changes totally in an ERP Environment as follows -

1. In the same system, accounts are now being maintained for all business units – cost centers, departments, companies, countries, regions and any other segment where accounting is required.
2. Consolidation is an automated process, and system has a capability to automatically calculate the consolidated balances at any consolidation level.
3. Revaluation, Conversion and Translation are automated
4. Intercompany and Interdepartmental transactions for both the units can be recorded in single transaction
5. Review of Journal and required Approvals can be obtained in the systems itself eliminating the need to have physical files
6. Segmentation Results can be obtained automatically.
7. The accounting flow is considered as a process and one transaction connects with the other transaction unless the process flow is completed.

COA - Traditional Accounting

Below is list of some of the concepts that will undergo a change as you move to ERP from a traditional or manual way of accounting:

1. There exists just one segment of accounts and they are classified as Assets, Liabilities, Shareholder Equity, Income and Expense. Whenever we have to journalize a business transaction we debit one account and pass the corresponding credit to the other account. A sample entry for an Asset Purchase will be as follows:

                                       Dr Furniture (Assest) A/c                 XXX $
                                       Cr XYZ Company A/c (Liability)        XXX$
Different Ledgers are maintained for all the departments, cost centers and companies where we need different Final Reports and accounting for each of these business units are maintained in these separate ledgers.
Consolidation is done at the end of the period by - sorting the balances on the Account and adding the balances for each account to derive the consolidated balances of the Head Office or Company at the Account Level.
If required, revaluation and conversions are done to equate balances to the reporting currency.

ERP Implementation Phases

ERP Implementation :- The list of generic phases as follows-

1. Project Planning, Scoping & Initiation
2. Business Proces Analysis
3. Workshops & CRP
4. Business Requirement gathering & Mapping
5. Application Architecture - Requirements & Strategy
6. Develop Custom Builts (GAPS)
7. Data Requirement & Strategy
8. Documentation
9. Testing - SIT, UAT
10. End User Training
11. Transition & Go-Live!!!

Microsoft Dynamics ERP

Microsoft Dynamics ERP solutions stand apart from other enterprise resource planning (ERP) software. Microsoft ERP products are exceptionally simple to learn and use as are the other Microsoft products, and they deliver long-term business value by working with any organization’s existing IT systems and scaling to grow with organization needs. As of now Microsoft Dynamics ERP includes five primary products:

• Microsoft Dynamics AX (formerly Axapta)
• Microsoft Dynamics GP (formerly Great Plains Software)
• Microsoft Dynamics NAV (formerly Navision)
• Microsoft Dynamics SL (formerly Solomon IV)
• Microsoft Dynamics C5 (formerly Concorde C5)

What if not ERP?

If the characteristics of the business process lead to the conclusion that the ERP vendor may not be the best selection, then there are three options remaining.

First - best-of-breed vendor.

Second - custom build the application—either in-house or outsourced.

Third - use a partner’s system.

When to choose Best-of-Breed???

R12 Create Employee as Supplier

Create Employee as Supplier

Solution
1.

2.

Accounting Concepts

Accounting is a systematic way to record transactions. An Account (in bookkeeping i.e. recording financial transactions) refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger i.e. main book for recording transactions, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. Examples of common financial accounts are cash, accounts receivable, mortgages, loans, PP&E, common stock, sales, services, wages, and payroll.

A chart of accounts i.e. list of accounts used by organization; provides a listing of all financial accounts used by particular business, organization, or government agency.

The system of recording, verifying, and reporting such information is called accounting. Practitioners of accounting are called accountants

 

Computerized Accounting Systems

§Recording refers to creating Journal entry for every financial transaction with Dr & Cr amounts.

§Classifying refers to each of Dr / Cr transaction to Owner’s Equity, Assets, Liability & Expense.

§Summarizing refers to grouping the transactions of assets, liability, revenue and expenses and preparing financial statements.