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.
Meaning of 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. These hierarchies need to be mapped to systems to ensure they are capturing the relevant business process information at relevant nodes to provide meaningful information for internal and external reporting.
Example
The account hierarchy allows you to map complex organizational structures of a business partner (for example, buying group, co-operative or chain of retail outlets). When you create a hierarchy structure, you form groups of business partners (for example, for purchasing groups). You can use them for statistical purposes and for marketing and accounting and other meaningful analyses.
Organizational hierarchies
Organizational hierarchies represent the relationships between the units/segments that make up your business.
Larger organizations may require some hierarchies that are based on business units and other hierarchies that are based on shared services, such as human resources and IT. They need to create cost centers in shared service departments and position them under business units, so that the costs of shared services are appropriately allocated. Now we will explore some examples of reporting needs arising out of these different hierarchies and dimensions. Any how they add complexity at transactional level to record relevant information appropriately.
Some areas where we need to deal with dimensions/hierarchies are:
Legal Structure
- Legal Entities
- Subsidiaries
- Tax Entities
- Statutory Entities
Operational Structure
- Business Units/Management Entity
- Divisions/Departments
- Business Functions
- Business Support Functions
- Organization Support Functions
- Cost Centers
- Profit Centers
- Business Employee Hierarchy
- Business Area /Project Area/ Controlling Area/ Product Lines/Service Lines
- Countries/Geography/Locations
- Accounts/Sub Accounts
Importance of Hierarchies
Defining organizational hierarchies enable to view and report on your business from different perspectives. You set up a hierarchy of legal entities for tax, legal, regulatory or statutory reporting. Various Legal entities can enter into legal contracts and are required to prepare statements that report on their performance. While performing business activities we need to capture and classify transactions at legal entity level to be able to identify transactions that belong to a specific legal entity. Therefore, there exists a need to define boundary at legal entity level to enable data classification, consolidation, security and reporting at these entity levels.
Example
A large corporate may create a central mailroom to receive all invoices from its vendors for which it need to make payment. These invoices are raised on separate legal entities within the same corporate group, but mailed to a central processing center for accounting and payment. The shared service resource who is working on these invoices must specify in the Accounting System the different legal entities to ensure proper treatment of these transactions. The payments should be issued from the respective bank accounts belonging to the legal entity on which the invoice has been raised.
You can create a hierarchy for purchasing function to control purchasing policies, rules, and business processes.
Related Links
You May Also Like
-
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.
-
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.
-
Business Metrics for Management Reporting
Business metric is a quantifiable measure of an organization's behavior, activities, and performance used to access the status of the targeted business process. Traditionally many metrics were finance based, inwardly focusing on the performance of the organization. Businesses can use various metrics available to monitor, evaluate, and improve their performance across any of the focus areas like sales, sourcing, IT or operations.
-
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.
-
Multi Currency - Functional & Foriegn
Currency is the generally accepted form of money that is issued by a government and circulated within an economy. Accountants use different terms in the context of currency such as functional currency, accounting currency, foreign currency, and transactional currency. Are they the same or different and why we have so many terms? Read this article to learn currency concepts.
-
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.
-
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.
-
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.
-
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.
-
Driving Business Efficiency through Divisions and Departments
In case of a multi-divisional organizational structure, there is one parent company, or head-office. And that parent owns smaller departments, under the same brand name. Dividing the firm, into several self-contained, autonomous units, provides the optimal level of centralization, in a company.
