Once on a consulting engagement, an accountant told me that he described his job to his five year old daughter as, “I put numbers in boxes.” That was a great explanation, and it helped define a pretty abstract concept. There are two basic premises to putting numbers in boxes. The first is that when you put a number in a box, there is some logic behind what box that number goes into, and second, that someone else can find the numbers in the boxes. The following actual case study provides insight into designing an accounting flexfield so that the “boxes” can help organize the important segments of the business.
A chart of accounts is a logical range of numbers that accountants use to keep track of a business’ assets, liabilities, equity, revenues, and expenses. Every type of business transaction falls naturally into one of these categories, providing a common way to record the financial operations of a company. Oracle E-Business Suite, through the accounting flexfield, allows the business to track other factors that affect the financial performance of the business. Each “perspective” is called a segment, and a business can define up to 30 segments for each set of books or ledger. Some of the more common segments that companies use include:
- Natural Account (asset, liability, equity, revenue, expense)
- Cost Center
- Product Line
Whether a business needs a certain segment or not depends on the nature of the business as well as on what information exists in other segments and in other parts of the E-Business Suite. A general rule when creating a chart of accounts is to keep one — and only one — type of data in a particular segment. For example, it is superfluous to have “Venture A — Georgia” in a Fund segment if a Location segment also exists. The location data should appear in — and only in — the Location segment. For more information on designing a chart of accounts, please see this article.Returning to the numbers in boxes analogy, put yourself in spring cleaning and organizing mode when looking at the accounting flexfield of a county government. The example below details the existing chart of accounts, the challenges that the users have when trying to report and analyze different aspects of the organization, as well as a recommended solution.
Case Study: County Government
Current COA Structure:
CASE: The current chart of accounts is an updated clone of the chart used in the legacy system. When it was only necessary to track financials at a transaction level, and identify the entry as an expense or revenue, this chart was adequate, and it remains functional for the accountants. However, over time, the government entity wanted to track monies spent for certain projects or programs, they needed to evaluate the cost and value of providing different services, and track grants. Additionally, reports were needed at the local level, at the state level, and at the federal level.
IDENTIFIED ISSUES OF CURRENT CHART OF ACCOUNTS:
Account Segment. The account segment consists of 5 digits, the first three of which identify what type of account it is (federal revenue, state expense, etc.). The use of accounts for detail transactions varies by department, and no decision has been made to standardize the level of detail to be tracked by separate accounts at the General Ledger level.
- Payroll and GL accounts do not map to each other but use a table validation process that is inefficient.
- The same account may be used differently from one department to another, leading to inaccurate data.
- Some accounts have similar names, leading to confusion.
- The process for authorizing, creating, defining, or changing accounts, cost centers, and departments is not documented, leading to inconsistencies.
Solution: A chart should reflect the lowest level of detail that needs to be tracked. For example, if the county needed to evaluate which type of road material was most cost effective, the accounts would be set up to reflect 1/4″Road Rock, 1/2″Road Rock, Sand, etc., with these road materials rolling up to a parent account of Road Materials. In this case, a statistical account could also be used to track the quantity of road materials used. When designing the values and the sizes of the segments, one should start at the lowest level of the hierarchy for each segment and allow enough room for growth at each level. In this case, if the lowest level is a raw material such as 1/4″Road Rock, then the county needs to determine the maximum number of materials used that would roll up to the parent of Road Materials. Let’s assume that there are over 100 potential road materials. If so, then the segment would need to leave 3 digits for the lowest level, and the category of Road Materials would start at the fourth digit from the right. Taking this a step further, if the county needs to determine the cost of building an entire highway, they might define the components of the account number to accommodate different rollup groups for different components. The first group would be road materials, the second might be equipment rental, and labor would be a third component, etc. Each of these components would be represented by the next digits. The county would need to decide whether there are 9 or 99 possible components and either allow 1 or 2 digits (beyond the 3 required for road materials) to represent this level of the highway construction.
Revise the chart of accounts so that Payroll and GL accounts map directly to each other. If there are expenses and revenues that are allocated to different types of accounts (state, federal, local), then there should be a roll-up group to reflect that. The account segment might rollup like this:
State Hwy Account Code (525) > Infrastructure Expenses (40) > Road Material (32) > Raw Material (510), making the account number 5254032510.
Location, Grant, Project. There is a need to track locations, grants, and projects.Solution: Let’s go back to the highway construction example given above. Creating a location segment would allow the county to track the costs of a specific road that is being constructed. The lowest level of a location might be a mile marker. The county might have as many as several hundred mile markers per stretch of road. If so, they would need to reserve 3 digits for the lowest level of location. The mile markers could roll up to a state road or an area (i.e. Metrowest), that could roll up to a precinct, etc. In designing the location segment, the county should start at the lowest area to be tracked.
The county might also receive a grant that is to be used for a portion of the highway. If so, they would need to track the expenses of the highway construction that would be funded by the grant. They also need to track the money received from the grant, the remaining balance available, and the portion of the budget allocated to each part of the construction.
As for projects, the county uses project accounting, so project-related information would be kept in that module and not in the accounting flexfield.
Cost Center Segment. The cost center segment currently consists of values with 7 digits, the first 3 of which identify the fund and the last 4 of which identify the department. This makes financial reporting difficult, particularly when cost centers are moved between departments. Historical reporting requires programming that determines which department a particular cost center was associated with at specific times in the past.
The process for transferring cost centers or divisions between departments or funds is not documented.Fund data already exists in the first segment of the chart of accounts. Putting it into another segment adds to the maintenance (you need to enter the information in two segments). It is possible to have inconsistencies when data must be entered twice. It also creates the necessity to repeat the cost center information for each fund.Using 3 digits to represent the fund limits the number of available digits left for cost center.Solution: The county needs to define the differences between a cost center and a department. There may be a rollup group where cost centers roll up into a division that may roll up into a department. If cost centers do not always roll up into departments, then there should be two separate segments, one for cost center and one for department. If there is a rollup group defined, then for a transfer of a cost center to a different department, all that would need to be changed is the rollup group. Fund data should be kept only in the fund segment.
Services and Programs. It is difficult to track the costs of a specific service such as recycling or dog catcher. Over time, these services have moved to the authority of different departments or cost centers. The same is true for special programs like a one-time tax relief program.Solution: There should be separate segments for Programs and Services.
At a minimum, the new accounting flexfield should have the following segments: Fund.Grant.CostCenter.Account.Location.Program.Service. Each segment length should have room for growth and clearly delineated ranges for rollup groups. The descriptions of all values for each segment and across segments need to be reviewed so that they are not redundant or confusing. The county should standardize and document the use of each of the segments across the organization, as well as procedures for creating, defining, and changing values.