A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA has transitioned from the legacy accounts, capturing just the natural account, to modern-day multidimensional COA structures capturing all accounting dimensions pertaining to underlying data enabling a granular level of reporting. Learn more about the role of COA in modern accounting systems.
A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA is used to organize the finances of the entity and to segregate expenditures, revenue, assets, and liabilities in order to give interested parties a better understanding of the financial health of the entity.
The chart of accounts is a list of all the accounts and their numbers contained in the general ledger. The accounts are listed in the order of assets, liabilities, owner's equity, revenue, and expenses. Transactions can be posted to each defined account in COA and it can capture balances in the general ledger chart of accounts is a way to outline the accounting system of a business, the chart of accounts establishes how the business will operate, what information will be captured, and what information will subsequently be readily retrievable by the system for reporting and other needs.
Have you ever wondered after hearing such phrases from accountants like "It's not in the chart of accounts. We don't know how to enter your transaction" or "We can't process your invoice without an account number." In the case of new general ledger implementations, nothing moves forward unless the chart of account has been finalized.
While to many non-financial managers and also to new IT implementers increased focus on the chart of accounts seems unwarranted and it appears that the client is unnecessarily slowing down the project by discussing chart of accounts too much. That's not really their purpose—and everyone who has worked in an IT project involving general ledger knows that this structure needs to be finalized first before other discussions can start and that too because it has a serious impact on the entire general ledger design.
The entire recording process of any accounting system requires a basic organization of data so that the accounting data can be clubbed into meaningful accounts and represented in a way useful for the users and stakeholders. For example – purchases on credit from vendors through invoices can be later summarized and reported with some clarity as to what was purchased, why it was purchased, what organization(s) benefited from those expenditures, and what is the unpaid liability on account of all those purchases. That basic organization is called a chart of accounts.
You might think of the organizing system for your company's accounting data as a collection of buckets, or accounts, each with a particular kind of data inside. There might be a bucket for each ledger account names and associated numbers used by a company, arranged in the order in which they normally appear in financial statements—Assets, Liabilities, Owners' Equity or Stockholders' Equity, Revenue, and Expenses.
For management analysis, there will also be a bucket for each product or service the company sells and one for each type of department or cost center where those expenses might incur as it sells its products or services. The chart of accounts is an organized, comprehensive list of all those buckets. The buckets, in turn, are labeled with their appropriate account number and arranged by the kind of data they hold, so that accountants can quickly find the right bucket in which to store the latest piece of data about a particular accounting transaction. These buckets are then arranged and rearranged during the accounting process and their contents are counted and checked to produce reports that summarize the data they contain.
General Ledger is used to recording and store each individual account and their transactions. The Chart of Accounts is the basis of any accounting system. The purpose of the Chart of Accounts is to classify each financial transaction and record it with reference to appropriate business dimensions enabling the users to select or extract the financial data through account inquiry screens or reports. Finally enabling reporting on (or enquire about) the sum total of financial transactions at various levels on the chart.
In ERP’s COA’s are captured using a defined segmented structure. Segmented COA Structure enables a business entity to record other accounting dimensions pertaining to financial transactions.
Modern organizations are complex generally consisting of many different lines of business; operating in different geographies, dealing in multiple products and services, running different projects, and moving resources and employees across these functions. The "chart of accounts” must reflect these complexities to enable effective management and external reporting. An effective chart of accounts structure can track revenue and expenses appropriately for different business dimensions like departments, geographies, product lines, etc. and can provide accurate analysis for decision making, and for reporting to government agencies, sponsors, and stakeholders.
In automated accounting systems and ERPs, the chart of accounts is made up of and represented as a string of numeric and alphanumeric fields that act as identifiers. The companies define different segments to capture relevant business dimensions along with the natural account associated with the transaction. Companies may define anywhere from one to dozen segments to make up their Chart of Accounts and capture granular level business information associated with the transaction.
Examples of accounting dimensions are Company, Cost Center, Department, Product, etc. The figure below shows an example of the Segmented Chart of Accounts Structure using some of the commonly used business dimensions.
Thorough planning and evaluation of financial needs is a prerequisite to designing a good COA Structure. We have created a separate tutorial on GL Accounts that helps you understand the concept of Natural Accounts and some key GL Accounts. There is a full tutorial on the understanding of COA in detail and best practices to define an effective COA Structure.
For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. Understand the concept of the subsidiary ledgers and control accounts.
Introduction to Organizational Structures
Organizations are systems of some interacting components. Levitt (1965) sets out a basic framework for understanding organizations. This framework emphasizes four major internal components such as: task, people, technology, and structure. The task of the organization is its mission, purpose or goal for existence. The people are the human resources of the organization.
Reversing Journals are special journals that are automatically reversed after a specified date. A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record subsequent transactions by eliminating the need for certain compound entries. See an example of reversing journal entry!
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.
Horizontal or Flat Organizational Structures
Flat organizational structure is an organizational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible between management and staff level employees. In a flat organizational structure, employees have increased involvement in the decision-making process.
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.
Hierarchical Organization Structures
Hierarchical structure is typical for larger businesses and organizations. It relies on having different levels of authority with a chain of command connecting multiple management levels within the organization. The decision-making process is typically formal and flows from the top down.
A legal entity is an artificial person having separate legal standing in the eyes of law. A Legal entity represents a legal company for which you prepare fiscal or tax reports. A legal entity is any company or organization that has legal rights and responsibilities, including tax filings.
General Ledger - Advanced Features
Modern automated general ledger systems provide detailed and powerful support for financial reporting and budgeting and can report against multiple legal entities from the single system. These systems offer many advanced functionalities right from journal capture to advanced reporting. This article will provide an overview of some advanced features available in today's General Ledgers.
Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts.
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