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Chart of Accounts Redesign Strategies


#D365 #D365FSC #D365FO #Microsoft #ChartofAccounts #Setup #Design #Architecture


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.

Consolidate different Chart of Accounts, No Problem for D365 (365financearchitect.com)


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,

Migration is not just for birds. Trial Balance Migration Strategy. (365financearchitect.com)


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

Automated Accounting Part 7, Fixed Asset Proceeds on Cash Flow Statement (365financearchitect.com)


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 !





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