Jul 28, 2007

Design of Nominal Accounts in ERP Environment - Being developed

An efficiently designed CoA can fulfill your following objectives:
1. Scalability
2. Simplicity
3. Is Logical

With these objectives in mind, I am giving below some guidelines in designing your CoA. These guidelines can be useful if you are moving into ERP since this gives you an opportunity to start afreash.

Length of the account: 6
Character type: Alphanumeric
Account Starting with :
1. Assets
11. Fixed Assets
111 L&B
112 P&M
113 F&F
114 CE
115 Vehicles
12 Current Assets
13 Investments, Loans and Advances
19 Intangible Assets
2 Liabilities
21 Current Liabilities
22 Short term loans
23 Long term loans repayable in one year
24 Long term loans
28 Provisions and Contingencies
3 Share capital and OE
31 Share Capital
32 Share premium account
33 Retained earnings
39 Minority Interest
4 Revenue
41 Income from operations
49 Other income
5 Costs of operations
6 SG&A Costs
7 Depreciation, Amortization and Finance costs
8 Suspense, rounding error, minority interest and others
9 ERP Contra Accounts

The last group is very important in an ERP environment. The contra accounts are a group of accounts which are to be set up in ERP scenario. Most of these accounts are not present / available in a traditional CoA. ERP maintains these accounts to handle the timing and module difference in the accounting impacts of various transactions. ERP ensures that the net balance in these accounts is zero at the end of a transaction cycle. Hence any balance at the period end in these accounts imply that a) some transcation cycle is yet to be completed in the current period b) bug in the program or c) incomplete set ups.

Normally these accounts do not get monitored periodically due to two factors. First of all these are balance sheet accounts which do not get the correct focus in a P&L focussed analysis. Another reason for poor monitoring is the unfamiliarity of the finance team with these accounts. The net impact is that there is huge balance lying in these accounts which raises some uncomfortable questions from the auditor.

Grouping these accounts ensures that these accounts are reconciled periodically along with the period close. This helps in ensuring financial integrity as well as certifying the system as bug free.

No comments: