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 |
There are two commonly used methods of accounting - Cash Basis and the Accruals Basis. Understand the difference between accruals and reversals. Recap the earlier discussion we had on accruals and reversals and see the comparison between these two different but related accounting concepts. Understand how the action of accruing results in reversals subsequently in the accounting cycle.
In this article, we will describe how to determine if an account needs adjustment entries due to the application of the matching concept. Learners will get a thorough understanding of the adjustment process and the nature of the adjustment entries. We will discuss the four types of adjustments resulting from unearned revenue, prepaid expenses, accrued expenses, and accrued revenue.
A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. A joint venture takes place when two or more parties come together to take on one project.
Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.
In this article we will discuss various types of "Management Entities". Various types of operational units, are created by management, to effectively run, manage and control their business. Different types of functional units, and divisional units, are widely used across industry.
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.
The general ledger is the central repository of all accounting information in an automated accounting world. Summarized data from various sub-ledgers are posted to GL that eventually helps in the creation of financial reports. Read more to understand the role and benefits of an effective general ledger system in automated accounting systems and ERPs.
GL - Understanding Chart of Accounts
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.
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.
Different Types of Organizational Structures
Modern business organizations run multiple product and service lines, operate globally, leverage large number of registered legal entities, and operate through complex matrix relationships. To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders.
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