Escolar Documentos
Profissional Documentos
Cultura Documentos
WHITE PAPER ON
CHART OF ACCOUNTS
- Kishore Khatri
White Paper on Chart of Accounts 2
A typical chart of account in an ERP environment will consist of multiple segments like Company,
Division, Location, Cost Centre, Account, Product etc. This allows the organizations to report financial
information sliced into various segments. A well designed chart of accounts helps in better statutory
compliance & efficient decision making.
a. Structure
The chart of account structure is the combination of multiple segments arranged in a logical order
where each segment has enough width to accommodate the values within. The CoA structure is the
basic configuration which cannot be changed once defined. Following are examples of some chart of
account structures:
Sample Structure
Segment > Company Cost Centre Line of Business Accounts Future
Width > 3 3 3 5 5
Sample Values
Code > 001 008 003 52396 00000
Meaning > XYZ Corp Marketing Chemicals Advt Exp Future
Sample Structure
White Paper on Chart of Accounts 3
Sample Values
Code > 001 003 122 73100 XPC125 00000
Meaning > ABC Corp Production Mumbai Material XPC125 Future
b. Segments
Each segment in chart of account represents a dimension required for financial transaction. In the
example given above for manufacturing company, there are six segments in the chart of account.
Whereas an organization can decide to have any number of segments, Oracle Applications requires
it to have a minimum of 3 segments in a CoA (Cost Centre, Natural Account & Balancing). Another 2
segments – Intercompany & Secondary Tracking- can optionally be defined in Oracle.
c. Values
Each segment is made up of a list of values. E.g. company segment will list all the companies in an
organization; Accounts will list all the natural account codes.
d. Summary Accounts
Summary account is a combination of more than one account so that the sum of balances of those
accounts becomes the balance of summary account. Hence summary accounts helps in summarizing
the balances of some accounts at a single place.
f. Security Rules
Security rules help in restricting the use of specific segment values by specific users or
responsibilities E.g. users in company 01 should not be allowed to use the value 02 in company
segment.
g. Aliases
An account alias is an easily recognized name or label for an account combination. This helps in
faster data entry & minimizing errors in selecting segment values.
White Paper on Chart of Accounts 4
a. Simple to understand
The account structure should be logically ordered & the labels should be self evident so that the
data entry users can start using the system with minimum training
c. Expandable
A good chart of account should have provision for accommodating future expansion of business. It
should have sufficient provision for defining more segment values, be it for company or account
codes. This means that while deciding the number of characters for individual segments, future
plans of the company should also be kept in mind. E.g. an organization currently having 6 legal
entities may think of having the company segment with a character length of one. This way the
segment will only accommodate maximum 9 companies. Hence it is recommended to keep the
length as at least 2 characters. So that 99 companies can be accommodated.
Also, there should be a provision for adding another segment to the existing chart of account based
on any requirement that may arise in future. This can be handled by defining a future segment with
default values of say 00000. As & when need for a new segment arises, this segment can be
renamed & used.
Following are some important factors which should be considered while designing chart of accounts
structure:
• Legal Entities
When a business group is operating though more than one legal entity, it requires having at-least
one trial balance per legal entity. However, in some cases, it may require to have more than one trial
balance for a legal entity. E.g. organizations in projects domain have multiple projects running under
same legal entity. There projects have their own budget & statutory requirements & hence their
own trial balance. It is important to discuss the current legal structure of the organization & also the
future plans to ascertain the level on which the trial balance is required to be produced.
Oracle provides the feature of balancing segment to identify the level on which the trial balance is to
be produced. Mostly this is the first segment in the chart of accounts & is often named as company.
System ensures that there is credit for every debit & vice versa for this segment.
• Budgeting
The level of budgeting done in an organization provides a guideline to prepare the company, cost
centre & natural account segments. Mostly organizations have multiple budgets representing
different departments, products or projects. The chart of account structure should be defined so
that budgets can be captured at an appropriate lowest level & also that the transactions can be
captured at those levels providing easy comparison with the budgets.
• Company Locations
In cases where the organizations operate from more than one location say through sales offices,
factories, subsidiaries etc, it may be helpful to record the location where a particular financial
transaction occurred. It may not be a good idea to have a trial balance for every location but there
can be a segment in the CoA to capture the location.
• Supplier/Customer Locations
Organizations which 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
White Paper on Chart of Accounts 7
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.
• SBU
Sub Business Unit or Operating Unit or Line of Business has been introduced more & more in
modern chart of accounts consequent to diversification of services & globalization of operations.
Business groups these days are providing services in multiple domains. While it may not be prudent
to have a trial balance generated at this level but business would certainly like to know which line of
business contributes how much to the cost & revenue. Though this may look purely as management
requirement but in certain countries accounts segmental reporting has been mandated & hence
maintaining accounts at SBU level makes sense.
• Products
Some organizations deal in products which are low in volume but high in value. Mostly these
organizations would like to analyze their costs & revenue for individual products. Where the
organizations are using inventory & manufacturing modules, the relevant direct costs can be
captured in the sub-ledger itself. However indirect costs & revenue may still need to be
apportioned. This may call to have a product segment in your chart of account. E.g. a manufacturing
& trading company producing high value generators would like to have a segment in the chart of
account so that the financials provide a full picture on product performance. On the other hand, a
supermarket dealing in thousands of product will have no interest in recording every transaction
against the individual product & hence will not require having a product segment.
• Projects
Similar to product segment, 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. Project costing module will certainly help in capturing this information. But again in cases
where costs are indirect or are being interfaced through other systems may not travel through
projects modules. In such cases, the management may wish to have a project segment in the CoA.
• Modules
Oracle applications provide a number of modules to cater to individual needs of various
organizations & functions within. While deciding what segments to include in the charts of accounts,
White Paper on Chart of Accounts 8
consideration should be given to the modules being used & the data which these modules are
capable of capturing. Modules like Payables, Receivables, and Assets etc which are called sub-
ledgers maintain all the details pertaining to suppliers, customers & assets respectively. Hence the
organization need not have a segment or value in chart of account to record this information in
detail. On the other hand, a project organization which is not using Oracle’s Project Costing module
may find it useful to have a project segment in the CoA.
• Reports
The reports required by an organization can broadly be divided into two parts. Firstly, the reports
that are mandated by law & secondly, the reports required by management for analysis & decision
making. All these reports provide an excellent guideline to decide what information should be
captured in the chart of accounts & hence what segments to be built in. More emphasis should be
given to statutory reports & one should ensure that the chart of accounts can help in generating
these reports with least possible intervention. Whereas some negotiation can be made on
management reports if certain reporting tools like Hyperion are being used. These reporting tools
have the capability of building rules & relationship & presenting the data in various dimensions
relieving the pressure from chart of account.
• Intercompany
In cases where the organization operates through more than one company/division, there are
intercompany transactions generated in the course of business. There are various ways to account
for these transactions. These may vary based on the local legal requirements or company’s policy.
When such transactions are very frequent, organizations may require having an intercompany
segment created in the chart of accounts so that the target company code can be selected by the
origin company. Oracle application provides an identifier for intercompany segments which help in
doing consolidation & elimination.
White Paper on Chart of Accounts 9
Company 01 Dr 1000
Company 02 Dr 250
Company 03 Cr 700
Company 04 Cr 550
done by Cross Validation Rules. By defining cross validation rules, we can restrict creation of invalid
accounting combinations.
On the other hand, if certain charts of account values have to be restricted for certain set of users, then
security rules have to be used. By defining a security rule & assigning the same to a responsibility, the
user of that responsibility is not allowed to use the specific value. E.g. Salary related accounts should
only be available to payroll team & not to other users.
Both cross validation & security rules need constant maintenance. Every time a new value is added to
the chart of account, it should be validated against the existing cross validation rules & security rules so
that the new value can be added to the required rule, if needed.
b. Approval process
Any change in value should ideally be approved by a centralized body responsible for chart of
accounts. This could be a couple of senior members of the corporate finance team or a person
each from business & finance. The levels of approval may vary from organization to
organization. But the basic idea of checking the implications of any change should be followed
while approving.
c. Documentation
The full initial design as well as any change in the chart of accounts along with the applicable
approvals should be documented in a central repository.
d. Alerts
Another good idea is to have an Oracle alert created to inform a set of users as & when any
change in made in chart of account values.
White Paper on Chart of Accounts 12
To summarize, Chart of Account is the foundation – the strength of which will decide the strength of the
building built over it – the ERP. There is no standard chart of account template which can be adopted by
all the organizations & every organization needs to build its own chart of account based on its own
experience. But there surely are some basics which go a long way ensuring the effectiveness of chart of
account. Time spent on visiting these basics is the time well invested in building a strong connected
organization.
This work is licensed under the Creative Commons Attribution-ShareAlike 3.0 Unported License. To view a copy of this license,
visit http://creativecommons.org/licenses/by-sa/3.0/ or send a letter to Creative Commons, 444 Castro Street, Suite 900,
Mountain View, California, 94041, USA.