Overview
A Chart of Accounts is the backbone of a financial system. It is a core setup in D365 Finance ERP system. A best of breed, thoughtful, Chart of Accounts will benefit financial reporting, facilitate validations, and streamline accounting and review.
Optimizing your new Chart of Accounts will use a combination of some, or all of the following strategies. These strategies are best practice suggestions, and are not mandatory requirements. Your Chart of Accounts will never be "Perfect" and will evolve. The strategies are meant to help you create a Chart of Accounts that will be flexible and stand the test of time.
Next we will dive into strategy considerations for your chart of accounts in the following sections.
Methodology
Where you are
Iteration and Collaboration
Multiple and/or Statutory Chart of Accounts
Continuity
Normalization
Numbering Conventions
Liquidity
Classification
Prefix/Suffix
Symmetry
Spacing
Delimiters
Significant digits
System Setup
Where You Are
Design starts with "Where You Are", in other words, look at your existing accounts and determine what elements (number, name, etc.) can be reused, and what can be discarded (unused accounts).
Iterative and Collaborative
The design process is "Iterative" and "Collaborative".
The expected outcome is to create a Chart of Accounts that is easy to use and maintain.
Legacy Chart of Accounts concepts, terminology, account names and definitions may be unclear or have multiple interpretations.
Design should strive to minimize communication errors, via iteration and collaboration.
What may appear as a redundant or repetitive discussion actually benefits clarity and accuracy for the design.
Use of abbreviations may be minimized to increase accuracy of journal codings.
Conversely, use of abbreviations may also be maximized to increase legibility of account names by decreasing length of account names.
i.e. Ambiguity by Definition
Example "Company" definition varieties
A Statutory entity
A Business Unit
A Database term
A Legal term for "Corporation" (vs "Partnership")
i.e. Ambiguity by Abbreviation
CT Expense
vs
Computerized Tomography Expense
Clinical Trials Expense
i.e. Legibility by length
Prepaid Expense, Insurance
Prepaid Expense, Insurance
vs
PPD, Insurance
PPD, Rent
Multiple Chart of Accounts
Legacy systems often have multiple Chart of Accounts. This is often the case when businesses are acquired and remain on their old accounting system.
Example Chart of Accounts varieties
Different Accounting Systems
Multiple Instances of the Same Accounting System
Main Accounts may facilitate governmental reporting and regulatory accounting.
This is normally applicable with USA Federal Government Contracting [GovCon].
In such instances, a 'Normalized' Chart of Accounts may not be applicable.
Example of GovCon COA with Non-Normalized Main Accounts
(multiple Main Accounts for Salaries)
MA# Name
501010 Salaries, Direct
601010 Salaries, Overhead
701010 Salaries, SG&A
Main Accounts may need to comply with jurisdiction regulations (i.e. France, Spain).
Certain countries' regulations are firm and must be complied with to avoid penalties and fines. Other countries' standard COA may be preferred, but compliance is optional.
D365 allows for multiple COA, and assignment of different COA to different Legal Entities.
CONTINUITY
To maintain continuity of the accounting records when designing your new Chart of Accounts, you should keep your legacy Chart(s) in the same worksheet as your new accounts.
If you are implementing a new ERP instance, like D365, keeping the old and new accounts in the same worksheet with greatly facilitate migration of trial balances. It will also help omitting some legacy accounts by mistake,
NORMALIZATION
Normalization is the design process of minimizing redundant information and maximizing matching conformity with a field's purpose.
Bad Example
We have not normalized the Main Account,
We have used the main account to denote Region,.
Setup
Main Account = North Salaries
Main Account = South Salaries
Main Account = East Salaries
Main Account = West Salaries
Region Dimension = North Region
Region Dimension = South Region
Region Dimension = East Region
Region Dimension = West Region
Possible Journal Scenario making reporting and data review a nightmare.
We cannot determine if the salaries are for the north or south.
North Salaries - South Region
Good Example
We have normalized the Main Account
Setup
Main Account = Salaries
Region Dimension = North Region
Region Dimension = South Region
Region Dimension = East Region
Region Dimension = West Region
Possible Journal Scenario making reporting and data review clear:
We now can clearly determint the salaries are related to the south.
Salaries - South Region
Normalization is usually a detailed very interactive process when designing values for segments (Financial Dimension) that have similar yet distinct intent.
i.e.
DEPT vs. COST CENTER
COST CENTER vs PROFIT CENTER
PROFIT CENTER vs LINE OF BUSINESS
Normalization is also usually a detailed very interactive process when designing values for segments (Financial Dimension) that may be intended to serve multiple purpose.
i.e.
DEPT as a Financial Report Segment
DEPT as a Personnel 'Report's to" Seqment
DEPT as a Security and Exchange Commission (SEC) classification
COGS
SG&A
R&D
NUMBERING CONVENTIONS
Several numbering conventions come into play when designing a Chart of Accounts.
These conventions sometimes easily overlap, at other times there will be delineation of what convention takes precedence.
Liquidity
Liquidity numbering is based on how quickly something turns into cash.
i.e. prefixes
10 CASH
Cash is King.
So, Cash is first: "10"
11 INVESTMENTS (Short Term)
Investments (like Money Market Bank Accounts) often turn into cash very quickly, thus "11"
12 RECEIVABLES
Receivables usually turn into cash slower than short term investments, thus "12"
14 INVENTORY
Inventory turns into Receivables when sold; turns into cash slower than Receivables, thus "14".
Classification
Separation of what you own, vs what you others vs what you owe owners is a basic accounting classification.
These accounts are commonly presented on the Balance Sheet financial statement
i.e. prefixes
1 Assets (what you own)
2 Liabilities (what you owe others)
3 Equity (what you owe owne
What you owe owners (Equity) includes an account to reflect prior year(s) results that is called: retained earnings.
To minimize the number of transactions in a retained earnings account, additional periodic/temporary (annual) accounts are used to classify the periodic business activities and then 'closed out' on an annual basis to Retained Earnings.
These accounts are commonly presented on the Income Statement financial statement, also known as the Profit and Loss Statement.
i.e. prefixes
4 Revenue
5 Cost of Goods Sold (COGS)
6,7,8 Expenses
Alphabetization
Organizing accounts by Name facilitates legibility and and increases speed of financial review and analysis.
i.e.
Federal Taxes
Health Insurance
Life Insurance
Relocation
State Taxes
Vacation
Prefix/Suffix
Organizing accounts with a Prefix and/or Suffix further facilitates legibility and and increases speed of financial review and analysis.
i.e.
Staffing, Benefits, Insurance, Health
Staffing, Benefits, Insurance, Life
Staffing, Benefits, Relocation
Staffing, Benefits, Vacation
Staffing, Taxes, Federal
Staffing, Taxes, State
Symmetry
Consistency in significant digits aids in correlation of related accounts
i.e.
MA Name
170120 Buildings
171120 Accumulated Deprection, Buildings
401010 Sale of Goods
501010 Cost of Goods Sold
401020 Sale of Services
501020 Cost of Sevices Sold
Digit Postition
Utilize values in different position of your account number for different meanings.
1xxxxx First digit to signify major account classification
i.e. Asset, Liability, Equity, etc.
x1xxxx Use second digit to provide secondary account classification
i.e. Assets
10xxxx Cash, 12xxxx AR, 14xxxx Inventory, 17xxxx Fixed Assets
i.e. Revenues
41xxxx Primary Revenues, 42xxxx Secondary Revues
xx1xxx Use third digit to provide further groupings
i.e. Payroll Liabilities
220xxx Staffing Salaries
221xxx Staffing Benefits
xxx111 Use last digits to provide detail account classifications
xxxx00 Ends with "00" = Headers
"9" Low priority accounts have a "9" in them
i.e. 701910 Misc Exp
or 701990 Misc Exp
Spacing
A COA is a 'living' list. There will always be a need for additional MA as the chart evolves.
Allowing gaps in number sequences makes room for future additions while maintaining your numbering conventions
i.e. New Main Account Number, while maintaining alphabetization
MA Name
220110 Staffing, Benefits, Insurance, Health
220120 Staffing, Benefits, Insurance, Life
220125 Staffing, Benefits, Insurance, Long Term Disability
220130 Staffing, Benefits, Relocation
220140 Staffing, Benefits, Vacation
220210 Staffing, Taxes, Federal
220220 Staffing, Taxes, State
Organizing segments with a prefix facilitates legibility.
This becomes important when viewing account segments in different sequences when you are using D365 Financial Dimension Sets
Example 1
Setup
Main Account 401010 Revenue
Main Account 501010 COGS
BU 100
BU 200
DEPT 100
DEPT 200
Report using FinDimSet = MA+BU+DEPT
401010-100-200
501010-200-100
vs.
Report using FinDimSet = DEPT+MA+BU
200-401010-100
100-501010-200
Example 2
Setup
Main Account 401010 Revenue
Main Account 501010 COGS
BU B100
DEPT D200
Report using FinDimSet = MA+BU+DEPT
401010-B100-D200
501010-B200-D100
vs.
Report using FinDimSet = DEPT+MA+BU
D200-401010-B100
D100-501010-B200
Delimiters
Avoiding use of the same delimiter used to delineate account string segments facilitates legibility of drill downs
i.e.
Main Account - Business Unit - Department
401010 -100 - 200
If the account string delimiter is "dash", then avoid names using the same delimiter.
Drill Down example using "dash" in names (decreased legibility)
Revenue - Sofware - SG&A - Finance - Accounting
Drill Down example using "comma" in names (increased legibility)
Revenue, Software - SG&A - Finance, Accounting
SYSTEM SETUP
This section is not intended to outline the specific steps to perform the System Setup creating your accounts.
In conjunction with the above sections, this section conveys system concepts to help you decide the best numbering and naming to use.
In D365 Finance ERP system the natural accounts are called Main Accounts [MA].
In D365 Finance ERP system a collection of Main Accounts is called a Chart of Accounts [COA].
Exhibit: Snippet from D365 General Ledger Module
When we setup a MA to automatically be assigned to lines in a transaction this is commonly called a Posting Profile.
Exhibit: Snippet of Inventory Posting Profile for Cost of units, invoiced
MA may be designed with multiple strategies for correlation to posting profiles.
1:1 One to One
1:n One to Many
n:1 May to One
D365 setup choices for Table/Group/All facilitate 1:1, 1:n and n:1 setups.
The exhibit above displayed auto assigning the Finished Goods (FG) Item Group to MA 140710.
MA may be designated to capture (not limited to):
i.e.
Revenues classified for External vs Intercompany Transactions
Accruals vs. Invoiced Transactions.
Interaction with a Particular D365 Module
Cash and Bank
Different Banks
Different Currencies
Accounts Receivable
Trade
Intercompany
Related Parties
Inventory
Raw Materials
Finished Goods
Revenues
Sale of Goods
Sale of Services
Isolate transactions for delineation on a particular financial statement
i.e. Cash Flow Statement line for proceeds from sale of fixed asset
Group several accounts to aggregate values.
i.e Total Cash
MA = 10* (* is a multicharacter wild card)
or
MA = 100000..109999 (.. is a range indicator)
i.e. Total Receivables
MA = 12*
Best Wishes on your new Chart of Accounts design !