Internally, an organization can be structured in many different ways, depending on their objectives. The internal structure of an organization will determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities such as the branch, department, workgroup and individual.
Internally, an organization can be structured in many different ways, depending on their objectives. The internal structure of an organization will determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities such as the branch, department, workgroup and individual.
We know that big multinational organizations operate in a matrix environment, constitute of many units and need different views of their operating and financial results. These different views may represent financials or profitability by geographies, countries, locations, businesses, segments, product lines, cost centers, functions, COE’s etc.
Various types of operational units, functional units and divisional units widely used across industry are briefly explained below:
Dimension |
Explanation |
Cost centers |
A cost center is part of an organization that does not produce direct profit and adds to the cost of running a company. Examples of cost centers include marketing & finance departments. It is an operating unit in which managers are accountable for budgeted and actual expenditures. Used for the management and operational control of business processes that may span legal entities. |
Business units/ Management Entity |
A semi-autonomous operating unit that is created to meet strategic business objectives. Used for financial reporting that is based on industries or product lines that the organization serves independently of legal entities. |
Value streams |
An operating unit that controls one or more production flows. Commonly used in lean manufacturing to control the activities and flows that is required to supply a product or service to consumers. |
Business Functions/ Departments / Divisions |
A department or division can be viewed as the intersection between a legal entity and a business unit. Departments can serve as profit centers. They can be used as cost accumulators and for revenue recognition. They may have profit and loss responsibility, and may consist of a group of cost centers. This operating unit defines academic areas, research units, or administrative offices with an appointed manager, that have programmatic, operational, fiscal and/or budgetary responsibility for a specific set of activities and projects/grants. |
Retail channels |
An operating unit that represents a brick and mortar store, an online store or an online marketplace. Used for the management and operational control of one or more stores within or across legal entities. |
Business Support Functions |
An operating unit that represents a category or functional part of an organization that performs a specific task to support inward-directed activity, such as sales or marketing to support business. Used to report on functional areas. A support function may have allocated budgets and may consist of a group of cost centers. |
Organization Support Functions |
Self-directed activity systems of an organization concerned with establishing and maintaining the organization as an entity. Each organization support function provides support to all functions, business, business support and other organization support functions. For example, corporate finance, IT functions, administration and knowledge management. An organization support function may have allocated budgets and may consist of a group of cost centers. |
Profit Center |
A profit center is a part of a corporation that directly adds to its profit, treated as a separate business and for which the profits or losses are calculated separately. This operating unit is held accountable for both revenues, and costs (expenses), and therefore, profits. Different profit centers are separated for accounting purposes so that the management can measure their relative efficiency and profit. |
Business Locations/ Countries/ Geography/ Supplier & Customer Locations |
Organizations operate from more than one location and may need to track where a particular financial transaction occurred. Some examples of need to track different locations could be transactions through sales offices, factories, subsidiaries etc. Organizations may even need to analyze the financial information based on the supplier’s or customer’s location may require a location segment dedicated to this. However this has very limited application in terms of usefulness. E.g. software companies cater to clients from all over the world & may like to make strategies based on which customer territory contributed how much to the revenue & hence a customer location is an important segment but for a manufacturing organization this will hold no relevance. |
Project Area
|
Certain organizations have their business models build around project activities. E.g. a property developer may like to have all its cost & revenue against individual projects. These organizations may have multiple projects running under same legal entity. There projects have their own budget & statutory requirements & hence their own trial balance. |
Product Lines/Service Lines
|
Some organizations deal in products which are low in volume but high in value. These organizations would like to analyze their costs & revenue for individual products. They also need to apportion indirect costs & revenues to these products/services so that the financials provide a full picture on product performance. On the other hand, a supermarket dealing in thousands of product might not have any interest in recording every transaction against the individual product or track financials at product level. Further each legal entity in the group may have its own set of released products that it wants to include in transaction documents. |
Accounts/Sub Accounts
|
Natural Accounts captures the nature of financial transactions such as Assets, Liabilities, Fund Equity, Revenues, and Expenditures. It captures the transactional information at detailed level that can be summarized to parent accounts for external and internal company-wide reporting. This hierarchy is helpful in organizing and summarizing reports. |
Business Employee Hierarchy |
Business employee hierarchy is the pyramidal type arrangement of the organizational employees. This vertical hierarchy helps in delegation of authority based on the span of control at multiple levels of employees. Each level in the hierarchy becomes an integral part of the chain of command and acts as the channel for transmission of authority to the succeeding lower level of the management. These hierarchical structures in organizations narrow down as we move in the upward direction and showcase centralization in the whole setup. At transactional level it is used to define the authority and set approval path and limits. |
Elimination Entity |
When a parent company does business with one or more subsidiary companies and uses consolidated financial reporting, any transactions between the companies must be removed, or eliminated, from the financial reports. These transactions are called elimination transactions. The destination company for eliminations is called the elimination company. |
Consolidation Entity |
A legal entity which is the consolidation company. During consolidation, transactions from several company accounts of subsidiaries is aggregated into a single company |
An organizational design is the process by which a company defines and manages elements of structure so that an organization can control the activities necessary to achieve its goals. Good organizational structure and design helps improve communication, increase productivity, and inspire innovation. Organizational structure is the formal system of task and activity relationships to clearly define how people coordinate their actions and use resources to achieve organizational goals.
Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.
Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.
Funds contributed by owners in any business are different from all other types of funds. Equity is the residual value of the business enterprise that belongs to the owners or shareholders. The funds contributed by outsiders other than owners that are payable to them in the future. Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities are debts payable within one year.
GL - Different Type of Journals
Two basic types of journals exist: general and special. In this article, the learner will understand the meaning of journalizing and the steps required to create a journal entry. This article will also discuss the types of journals and will help you understand general journals & special journals. In the end, we will explain the impact of automated ERPs on the Journalizing Process.
An account inquiry is a review of any type of financial account, whether it be a depository account or a credit account. In this tutorial, you learn what we mean by drill through functionality in the context of the general ledger system. We will explain the concept of drill-down and how it enables users to perform account and transaction inquiry at a granular level and the benefits of using this functionality.
Defining Organizational Hierarchies
A hierarchy is an ordered series of related objects. You can relate hierarchy with “pyramid” - where each step of the pyramid is subordinate to the one above it. One can use drill up or down to perform multi-dimensional analysis with a hierarchy. Multi-dimensional analysis uses dimension objects organized in a meaningful order and allows users to observe data from various viewpoints.
Trial Balance in General Ledger
One of the greatest benefits of using a double-entry accounting system is the capability to generate a trial balance. What do we mean by trial balance? As the name suggests a trial balance is a report that must have its debits equals to credits. Understand the importance of trial balance and why it is balanced. Learn how it is prepared and in which format.
The sole trader organization (also called proprietorship) is the oldest form of organization and the most common form of organization for small businesses even today. In a proprietorship the enterprise is owned and controlled only by one person. This form is one of the most popular forms because of the advantages it offers. It is the simplest and easiest to form.
Operational Structures in Business
Large organizations grow through subsidiaries, joint ventures, multiple divisions and departments along with mergers and acquisitions. Leaders of these organizations typically want to analyze the business based on operational structures such as industries, functions, consumers, or product lines.
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