GL - Account Allocations

GL - Account Allocations

An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.

What is Account Allocation?

Allocation is the act of distributing according to a plan. As per the dictionary allocate means to set apart for a special purpose; designate; distribute according to a plan. From an accounting context, it means a system of dividing overhead expenses between the various departments of a business. Figuratively, earmarked is often used in regard to monetary allocations although it is heard in other contexts as well.

The allocation also refers to a piece of the pie, a share in the profits, a portion of whatever is being divided up and parceled out usually money, but in an accounting context is applicable to account balances. This expression probably has its origin in the graphic representation of budget allotments in circular, pie-shaped form, with various sized wedges or pieces indicating the relative size of allocations to different agencies, departments, etc.

Concept of Mass Allocations:

Mass allocations is a functionality offered by many automated systems and ERPs to distribute the account balances from one account to several others based on a formula or mathematic logic. Users can define a Mass Allocation formula to create journals that allocate revenues and expenses across a group of cost centers, departments, divisions, locations, and so on using any accounting dimension available. Users can include parent values in allocation formulas that can enable allocating to the child values referenced by the parent without having to enumerate each child separately.

GL - Account Allocations

Different Type of Allocations:

The commonly used allocations can be grouped as follows:

  • Net Allocations: allocated amounts that reflect changes to the cost pool.
  • Step–Down Allocations:  distributing amounts from one allocation pool to a subsidiary allocation pool.
  • Rate-Based Allocations: using current, historical, or estimated rates to allocate costs.
  • Usage-Based Allocations: using statistics such as headcount, units sold, square footage, number of deliveries, or computer time consumed to calculate allocation amounts.
  • Standard Costing Allocations: using statistics such as sales units, production units, number of deliveries or customers served to perform standard costing.

Examples of Allocation:

Allocations can be used in various practical business situations. For example, consolidated rent paid can be allocated to another division based on the area of usage, or, a pool of marketing costs can be allocated to several departments based on the ratio of department revenues to total revenues. Some of the commonly used examples are:

  • Distributing rent to departments based on area
  • Distributing common project costs to various cost centers
  • Distributing head office expenses to sales offices based on the volume of sales
  • Distributing marketing costs to product lines based on revenue
  • Distributing common employee expenses to employee cost for assessments

In the example shown in the figure, we have a company which has taken a 1000 square feet office space on rent. The expenses for rent are borne by the head-office and payment to the landlord is also made by the head office. To know the true profitability of each of the departments (Department A, B & C) the rent needs to be allocated to each one of them.

Each department occupies different areas and the company has taken the measurement of the areas occupied by each of the departments. In the example shown here, the rent is being allocated to different departments based on their usage factor. This is an example of the concept of allocation and automated accounting systems help handle complex allocations programmatically.

Difference between Allocations & Recurring Journals:

Recurring Journals are for transactions that repeat every accounting period and allocation Journals are for single journal entry using an accounting or mathematical formula to allocate revenues and expenses across a group of accounting dimensions like cost centers, departments, divisions, locations, or product lines depending upon usage factors.

Related Links

Creation Date Tuesday, 30 November -0001 Hits 26106

You May Also Like

  • Sole Proprietorship Form

    Sole Proprietorship Form

    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.

     

  • GL - Accruals and Reversals

    GL - Accruals and Reversals

    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.

  • Complexities in GL System

    Complexities in GL System

    Although technically a general ledger appears to be fairly simple compared to other processes, in large organizations, the general ledger has to provide many functionalities and it becomes considerably large and complex. Modern business organizations are complex, run multiple products and service lines, leveraging a large number of registered legal entities, and have varied reporting needs. 

  • Organizational Design

    Organizational Design

    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.

  • GL - Accrued / Unbilled Revenue

    GL - Accrued / Unbilled Revenue

    Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the customer or posted to the general ledger. Understand what we mean by the terms accrued revenue, accrued assets, and unbilled revenue. Explore the business conditions that require recognition of accrued revenue in the books of accounts and some industries where this practice is prevalent. 

  • General Ledger - Advanced Features

    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.

  • Concept of Subsidiaries

    Concept of Subsidiaries

    A subsidiary is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or wholly controls the activities and policies of the daughter corporation.

  • Legal Structures in Businesses

    Legal Structures in Businesses

    Businesses not only vary in size and industry but also in their ownership. Most businesses evolve from being owned by just one person to a small group of people and eventually being managed by a large numbers of shareholders. Different ownership structures overlap with different legal forms that a business can take. A business’s legal and ownership structure determines many of its legal responsibilities.

  • Record to Report Process

    Record to Report Process

    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. 

  • The Accounting Equation

    The Accounting Equation

    In this article we will help you understand the double-entry accounting system and state the accounting equation and define each element of the equation. Then we will describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.

Explore Our Free Training Articles or
Sign Up to Start With Our eLearning Courses

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved