Thursday, July 15, 2004
Business need for Chart of Accounts - An Overview
The Chart of Accounts (COA) is the account structure the organization uses to record transactions and maintain financial account balances. Oracle General Ledger defines the COA structure in the Accounting Flexfield. The structure enables the organization to categorize accounting information during the recording process. The structure is comprised of multiple uniquely defined segments. Each segment contains a list of values, such as the list of Cost Centers or Natural Accounts. The various combinations of the segment values represent the unique account combination to which accounting transactions are posted and account balances are maintained.
When defining the Accounting Flexfield (COA) segments, Oracle requires one segment be designated as the balancing segment and one segment be designated the account segment. The balancing segment identifies an entity requiring a self-balancing trial balance, such as Company. The Account segment identifies the segment used to produce the Financial Statements such as Cash, Accounts Payable, or Revenue. Additionally, Oracle allows the designation of a cost center segment. The cost center segment identifies functional areas of the business such as Finance and Marketing. The cost center segment value is primarily used for reporting in Oracle Assets or Projects.
There are several constraints that should be adhered to when defining the organization’s COA in Oracle
- COA structure must contain at least 2 segments (Balancing and Natural Account) and no more than 30 segments
- Total length of segment combinations cannot exceed 240 characters
- Each Natural Account value must have only one Account Type (e.g. Expense, Asset, etc…)
Benefits of Common Chart of Account Structure
Some of the benefits of using a Common Chart of Accounts are the following: -
- Drives consistency of reported information across business units and ensures compatibility
- Reduces the effort to consolidate information to satisfy management requests
- Reduces reconciliation procedures
- Provides easier benchmarking between different business units/territories
- Allows ability to leverage staff between different business units
- Reduces learning curve due to commonality
- Provides a framework to introduce financial shared services
Chart of Accounts Impact on Reporting
The primary purpose of the General Ledger is financial reporting and financial analysis. The Chart of Account structure defines the nature, ranges, and groupings of information available for reporting and inquiry. Reporting is generated by ranges and groupings of values for one or more segments. Management must define the dimensions by which financial data will be analyzed and reported and ensure those dimensions are reflected in the segments contained within the COA structure.
Chart of Accounts Best Practices and Development Guidelines
- Determine the scope that the chart of accounts must support. The scope should begin with GAAP reporting requirements followed by management reporting requirements. Common examples of Management reporting requirements are Geographic Regions, Product Line reporting, Activities, and Cost Centers.
- Team members in the chart of accounts design process should be functionally aligned as opposed to geographically aligned. This facilitates the aim of developing a standard COA across global boundaries.
- Design a flexible chart of accounts that will reflect current business processes and accommodate organizational changes in the future. Consider future segments if involved in a high-growth, dynamic industry or environment.
- Each measured dimension of the business should be a separate segment. Segments used for more than one dimension limit the use of standard default values and complicates reporting by making data difficult to isolate. In addition, it precludes the user from using more than one dimension in an individual transaction. This also complicates the processing of consolidations and allocations, validation/security rules, and reporting.
- The resulting COA structure should be more horizontal in design with reporting across segments instead of using individual values for multiple dimensions.
- Limit detail in values and report on information in the appropriate source (subledger) system unless the data is scattered among multiple systems. (e.g. create the minimum number of accounts for GAAP reporting of PP&E. Create Asset Categories in Oracle Assets that “roll-up” to the respective natural accounts and report detail out of the Assets subledger)
- Product segments should be carefully considered for inclusion in the Accounting Flexfield Structure if there are extensive product lines. Try to identify major product lines for meaningful reporting in the General Ledger and look to the relevant subledger for detail reporting.
- Project segments may be considered if not using Project Accounting. Project Segments are not recommended if Project Accounting is to be used. All project reporting should be generated from the Projects subsystem.
- Carefully consider usage of summary accounts to capture information. Balances are stored at both the detail and summary levels and can negatively impact some concurrent processes. Summary Accounts may significantly improve FSG reporting.
- Avoid intelligent numbering (Assigning a meaning to every digit of a segment value). This complicates allocations and reporting.
- Avoid using dependent segments. Allocations work off independent segments and may not function properly with dependent segments.
- Define segments as Character Type
- Avoid alpha characters in segments, except for parent values. Alpha Characters complicate sorting data, using ranges, assigning codes, and creation of validation/security rules.
- Use all capital letters for data entry. This promotes consistency and simplifies query retrievals.
- Use parent/child relationships to facilitate reporting versus creating additional segments values.
- Assign segments in the most logical data entry order. Default segments should be at the very beginning or end of the accounting flexfield structure.
- Verify that you can perform complex allocation schemes.
- Document mappings to legacy chart of accounts. This will assist in populating conversion tables and in reconciling discrepancies.