10.5 IMPLEMENTATION CONSIDERATIONS
When implementing a new general ledger system, there are a variety of considerations that affect the design of the chart of accounts:
• Financial Information Needs. Using reporting requirements to drive the definition of the chart of accounts and the financial reporting structure.
• Separate Budget Centers versus Separate Accounting Companies. Knowing how to meet financial reporting requirements by defining the proper budget centers, financial reporting structures, and accounting companies.
• Account Numbering Considerations. Issues to consider when defining and setting up the chart of accounts.
• Initializing the Chart of Accounts with Valid Account Numbers. Understanding different approaches for loading the account information into the general ledger system.
For the most part the issues presented here are not specific to any general ledger systems, but are instead broad considerations that must be made during the implementation of any new system. They should also be considered when making significant changes to an existing chart of accounts.
FINANCIAL INFORMATION NEEDS
Any initial setup or redesign of the chart of accounts must start by addressing the organization's financial reporting needs. This requires a review of existing reports and of the current chart of account organization. Also, reviewing the organization chart and conducting any follow up interviewing can provide an understanding of the different areas of financial responsibility for various parts of the organization.
So as not to duplicate an unsatisfactory situation, the accounting analyst must understand the shortcomings of the current environment and the requirements for improved financial reporting that overcome those shortcomings. One way to accomplish this is to produce mocked-up versions of new or proposed financial reports used by various parts of the organization. The focus of this should be on what the necessary financial information is rather than on how it is reported. Report layout issues (e.g., comparison against budget, comparison against prior year, year-to-date activity, current period activity, and multiperiod trends) can be addressed after the chart of accounts is finalized.
The individual accounting analyst performing this work should be able to identify the appropriate measures of performance used for different areas of the organization. Many budget center managers are responsible for cost control, or minimizing expenses. Other measures of responsibility include maximizing operating efficiency, maximizing profit, or maximizing sales per square foot. This information will eventually be used to assist in defining the responsibility reporting schema (as in Figure 10-6).
The result of all this effort is the identification of
• Financial information needs by budget center.
• New financial accounts or refinements to existing accounts.
• The necessary budget centers and financial reporting structures.
• Any improvements or refinements to the account number configuration.
SEPARATE BUDGET CENTERS VERSUS SEPARATE ACCOUNTING COMPANIES
The budget center represents a subdivision of the organization, usually one for which a single individual is responsible. Accounting companies can take on this same property, which tends to confuse the issue of using either approach to divide organizational responsibility. For example, should a particular set of manufacturing plants be different budget centers in one chart of accounts or different accounting companies, each with their own chart of accounts?
An accounting analyst should understand the ramifications of using either approach for splitting organizational responsibility so that he can effectively define the chart of accounts and meet defined business requirements. Figure 10-16 shows how certain requirements are implemented using different organizational entities that are either accounting companies or budget centers.
Figure 10-16 Use of Accounting Companies versus Budget Centers for Dividing Organizational and Financial responsibility
|
|
Entity |
|
Requirement |
Accounting Company |
Budget Center |
|
Reporting across entities |
More difficult |
Easy |
|
Ability to control posting and balancing within entity |
Easy |
More difficult |
|
Accounting for journal entries that cross entity boundaries |
More difficult |
Easy |
Use the hints shown in this chart when considering how to represent organizational responsibilities in the general ledger. In addition, it is also a good idea to understand limitations or benefits that the specific general ledger system has with respect to either approach. Many organizations needlessly cause extra effort and operational inefficiencies by not knowing the strengths and weaknesses of their own general ledger system.
Not long ago, an international manufacturer of consumer goods discovered that using accounting companies as separate financial reporting entities can have certain disadvantages. They set up six separate accounting companies for areas of their organization that were headed by six separate executives. The idea behind this design was to use each accounting company to produce its own financial reports, thus making the executive responsible for his own "company."
However, this design also placed most of the current assets in only a few of the accounting companies. For example, one accounting company, included the corporate accounting organization and had all of the cash accounts. This required all other accounting companies to debit or credit an intercompany clearing account (eliminated during consolidation) for posting any transactions that involved cash. Not only did the volume of intercompany clearing account transactions become cumbersome, but suspense account follow-up and resolution were tedious. To compound the problem, the particular general ledger system being used was relatively inflexible when it came to intercompany accounting. This drawback required many useful features to be foregone because of this multi-company design.
The solution to this problem eliminated the separate accounting companies by combining all financial activity under one company. Under this design each executive's financial statements were assembled by defining their responsibility in summary budget centers. The information reported at each summary budget center reflected the same financial information that was reported under the previous arrangement. But under the new arrangement, all intercompany accounting was eliminated.
When Should Unique Accounting Companies Be Used? Organizations often set up unique accounting companies in their general ledger system
• For business units that have their own general ledger system.
• For each separate legal entity.
• For separate business units measured by their own return on investment (or return on assets).
• For business units that have their own accounting department and are in full financial control over a balanced set of accounting records.
• For a separate fund or program in a nonprofit organization.
• For making tax-basis adjustments to a set of accounting records.
The most common examples of separate accounting companies occur in the first few cases noted—that is, when the business unit involves a separate general ledger system, a separate legal entity, or is measured by return on assets or investment. Organizational units that are responsible for net income alone, and not a return on assets, are often best managed using unique budget centers.
When Should Budget Centers Be Used? As the examples earlier in this chapter point out, budget centers are generally used to implement responsibility re-porting for the organization. Here, the budget center becomes a focal point for reporting the general ledger accounts under each individual manager's span of control. When faced with a decision to treat an organizational unit as either a budget center or an accounting company, consider the reporting requirements for this entity. If they are more along the lines of responsibility reporting than full financial control (i.e., control over a balanced set of accounting records), it is likely that this unit should be set up as a budget center.
These guidelines should not be taken as hard and fast rules. Any organization can have its own particular characteristics that influence how a particular part of the organization should be set up in the chart of accounts. When correctly structured, the end result should support the financial reporting requirements of the organization in a manner that both minimizes the burden on the accounting department and takes advantage of the general ledger system features and capabilities.
NEXT MONTH'S TOPIC: ACCOUNT-LEVEL CONSIDERATIONS
Copyright 2008 by Douglas A. Potter, all rights reserved.