White Paper Chart of Accounts Design

Prepared By: Atna Technologies India Private Limited

This document explains the Importance, Accounting Principle & guiding factors affecting the Design of Chart of Accounts and Chart of Accounts Design/Mapping in ERP -MS Dynamics NAV 2009.

1|Page

Revision History
Version 0.1 0.2 0.3 Date 25th November, 2010 26th November,2010 26th November,2010 Prepared By N.Prabhakara K.Maiya N.Prabhakara Remarks Initial Version Review Published

2|Page

Table of Contents
1. 2. Introduction to Chart of Accounts (COA) .............................................................................................. 4 Accounting Rules and Principles guiding COA Design ........................................................................... 5 2.1. 2.2. Double entry system in Accounting: ............................................................................................. 5 What are Different Three types of Accounts with its Golden Rule?............................................. 5

(1).Personal Account: ............................................................................................................................ 5 (2).Real Account: ................................................................................................................................... 6 (3).Nominal Account: ............................................................................................................................ 6 2.3. 2.4. 2.5. 3. 4. 5. 6. 7. What is Debit and Credit in Accounting? ...................................................................................... 6 Debit and Credit principle ............................................................................................................. 7 Basic Accounting Principles and Assumptions .............................................................................. 7

Types of Main Groups of Accounts considered in designing COA ........................................................ 9 Types of Sub Groups to Main Groups considered in designing COA .................................................. 10 What are ACCOUNTS and its Importance? ......................................................................................... 11 Numbering Methodology.................................................................................................................... 12 Basic Reporting in Accounting ............................................................................................................ 14 7.1. 7.2. 7.3. Trial Balance ................................................................................................................................ 14 Profit and Loss (Income) Account ............................................................................................... 14 Balance Sheet .............................................................................................................................. 14

8. 9.

Chart of Accounts Design/Mapping in ERP-Microsoft Dynamics Nav 2009 ....................................... 15 References: ......................................................................................................................................... 17

3|Page

1. Introduction to Chart of Accounts (COA)

The Chart of Accounts is the ordered list of a Companys general ledger accounts. While there is flexibility in tailoring a chart of accounts to best suit a Company's needs, the accounts are generally grouped by type first, and then aggregated into larger categories. Chart of Accounts is built to cater the Reporting needs of Share Holders, Owners, General Public and Government.

At the most general level, the categories for the Chart of Accounts will usually follow the Balance Sheet Accounts (assets, liabilities, and equity) and Income Statement accounts/Profit & Loss accounts (operating revenue and expenses, and non-operating revenues/gains and non-operating expenses/losses). Besides the name of the account, each account is usually assigned a unique and significant number identifying the department, type of account, etc. The numbering convention is designed with ample space left for the addition of new accounts in the future.

4|Page

2. Accounting Rules and Principles guiding COA Design

Accounting Rules and Principles are guiding the Chart of Accounts of any Company which in turn governed by respective Country Accounting bodies likes ICAI, (Indian Chartered Accountants of India) in India.

2.1.

Double entry system in Accounting:

The Accounting is working on Double Entry System. Any Transaction or Event which are in financial in nature affecting the Business will be recorded in Books of Accounts with two aspects to it. Example: Purchase of Stationery from M/s XYZ Co., worth Rs. 1000/For this transaction we can see two aspects a) Stationery which we brought --- We can call as STATIONERY ACCOUNT b) XYZ Co., from whom we purchased ---We can call as XYZ CO., ACCOUNT Paid Salaries to employees for the month of April by HDFC Bank Ltd Account Rs.1,50,000/For this transaction we can see two aspects a) Salaries which is paid --- We can call as SALARIES ACCOUNT b) HDFC Bank Ltd., account reduced by paying Salary --- We can Call as HDFC Bank Ltd., ACCOUNT Like in above example all the events and transactions will have two aspects, which are recorded as Debit and Credit in Accounting. Each aspect is named as ACCOUNT to have identification for further & future transactions and to have a track. There are different types of ACCOUNTS in Accounting, which are discussed next, which primarily rule the CHART OF ACCOUNT DESIGN of any Company.

2.2.

What are Different Three types of Accounts with its Golden Rule?

The three types of Accounts in Accounting are as follows which are decided on its nature as explained in examples i.e., the two aspects. (1).Personal Account: It relates to any person. Example: Individual, any artificial person like company, firm, an institute etc. This may be further classified:a) Natural Personal A/c:-it relates with natural person e.g. Raj, Sachin, Mohit etc. b) Artificial Personal A/c:-It relates with artificial person e.g. Company, Club and Bank etc. c) Representative Personal A/c:-It represent the other person e.g. Outstanding Salary A/c, Prepaid Exp. A/c, wages outstanding A/c.etc. Debit / Credit Golden Rule for Personal Account: Debit ---- The Receiver Credit ----The Giver 5|Page

(2).Real Account: It relates to any assets. Example: Land, Building, Machinery, Furniture & fixture etc. It relates to "TANGIBLE" as well as "INTANGIBLE" assets. a) Tangible Assets: - Which can be touch & seen. E.g. Land, Building Furniture etc. b) Intangible Assets: - Which can't be touch & seen e.g. Goodwill, Patent, Trademarks etc. Debit / Credit Golden Rule for Real Account: Debit ---- What Comes In Credit ----What Goes Out (3).Nominal Account: It relates to expenditure & incomes. Example: Rent, Wages, Traveling Exp. Salaries, Sales, Interest Received etc. a) Expenses: - Salaries, Rent paid, Stationery, Telephone expenses, Interest paid etc., b) Income: - Sales, Income, Interest received etc., Debit / Credit Golden Rule for Nominal Account: Debit ---- All Expenses and Losses Credit ----All Incomes and Revenues/Gains

2.3.

What is Debit and Credit in Accounting?

Debit and credit are formal bookkeeping and accounting terms. They are the most fundamental concepts in accounting, representing the two aspects/sides of each individual transaction recorded in any accounting system. A Debit indicates an asset or an expense transaction, a Credit indicates a transaction that will cause a liability or a gain. A debit transaction can also be used to reduce a credit balance or increase a debit balance. A credit transaction can be used to decrease a debit balance or increase a credit balance. Debit and credit form the basis of the double-entry bookkeeping system. Every debit and credit value is recorded in ledgers and from these ledgers financial reports can then be prepared.

Debit & Credit example:

You can learn to understand to identify the two basic aspects/components of each transaction: Step-1 What did you get? Where did it come from? Step-2 The debit is what you got and the credit is the source of the item you received.

6|Page

Step-3 (Example) lets imagine that you purchase a computer with your credit card. Since the computer is what you received it's going to result in a debit to the asset account for your computer. The credit will be applied to the credit card liability account for the same amount.

2.4.

Debit and Credit principle

Each transaction consists of debits and credits, and for every transaction they must be equal. For Every Transaction: The Value of Debits = the Value of Credits Debits are on the left and increase a debit account and decrease a credit account. Credits are on the right and increase a credit account and decrease a debit account. Examples: 1. When you pay rent with cash: you increase rent (expense) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction. 2. When you receive cash for a sale: you increase cash (asset) by recording a debit transaction, and increase sales (revenue) by recording a credit transaction. 3. When you buy equipment with cash: You increase equipment (asset) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction. 4. When you borrow with a cash loan: You increase cash (asset) by recording a debit transaction, and increase loan (liability) by recording a credit transaction. 5. When you pay salary with cash: you increase salary (expenses) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.

2.5.

Basic Accounting Principles and Assumptions

The following are the basic Accounting Principles and assumptions which govern further the Chart of Accounts design: 1. Business Entity: This principal treats the company as a separate entity from its owners. Personal accounts of owners/partners should be kept separate from profits and expenses of the company. 2. Cost: This principle states that the company has to consider the original cost of fixed assets like building and machinery, rather than market value. But today most of the companies report only the market value. 3. Sincerity: According to this principle, the auditors should prepare the financial reports in order to project the real financial position of the company rather than fabricating facts.

7|Page

4. Monetary Unit: This principle assumes that transactions should be recorded in a single currency and exchange rate. This will help the company compare its accounts to the previous years, in spite of a change in the rate of inflation. 5. Consistency: According to this principle, the accountants should use the same methods and functions for different periods of time. For example, the same rate of percentage should be applied for all depreciation. This principle is also known as the principle of regularity. 6. Prudence: The main objective of this principle is to show the real financial position of the company. The accountants should show the correct revenue accounts and provide a provision for expenses which may occur in the future. 7. Matching: According to this principle, all the revenues and concerned expenses incurred should be shown in the same financial period. The main objective is to avoid any overstatements of income at any particular time. 8. Accrual: This principle requires the company to record the revenue or income when it is actually earned. 9. Continuity or Going Concern: This principle presumes that the functioning of the company will be smooth and the business entity will continue to operate for a fairly long period. 10. Time Period: This principle specifies a particular interval of time for which the financial reports are prepared. It can be year, fiscal year or short period like a quarter or a month. 11. Full Disclosure/Materiality: This principle states that the full disclosure of information and events should be ensured. The financial reports should not mislead the investors and should provide clear details of the financial position of the business. 12. Dual Aspect: According to this principle, all financial transitions have two effects. This is the basis of the accounting equation: Assets = Liabilities + Equity

8|Page

3. Types of Main Groups of Accounts considered in designing COA

After knowing the following from above discussion: 1. Double Entry System in Accounting 2. Three Main Account Types and its Golden Rules of Debit / Credit 3. Term Debit and Credit and its Principle 4. Basic Accounting Principles and Assumptions The following are the types of Main Groups of Accounts considered while designing COA as follows which are classified on the basis of three main Accounts Types:

1. Assets
-- Which continues year and after which are mainly owned by the Company (Land, Building, Stock etc.,) and receivable to company (Sundry Debtors-From Customers etc,).

2. Liabilities
Which continues year and after which are to be paid by the Company (Example: To Owners Share Capital, Sundry Creditors-To Vendors, Loan payable to Bankers, etc.)

3. Income / Revenue
--Money / Currency which are generated / receivable from operations and task. Example: From business (Sales revenue), From profession (Consultancy Fee), Interest received from Bank etc.,

4. Expenses / Loss
--Money / Currency which are expensed / payable because of the operations and task. Example: Salaries paid, Interest Paid, Stationery purchased, Electricity bill paid etc.,

9|Page

4. Types of Sub Groups to Main Groups considered in designing COA

After knowing the Main Groups of Accounts, further sub classifications done to facilitate the Accounting Principles and Assumptions and which are in turn, governed by Accounting Standards of the respective Countrys Accounting Governing body like ICAI, (Indian Chartered Accountants of India) in India. (For Accounting Standards in India refer to www.icai.org) The sub groups are very important to monitor the transaction flow of the Company and map the transaction/event of financial nature occurring in the business/operation to correct sub groups which in turn connected to Main Groups (Asset, Liability, Income and Expenses). The sub groups varies from Company to Company depending upon the following some important factors. 1. Nature of industry 2. Nature of business 3. Country specific accounting rules 4. Management specific 5. Product specific 6. Costing methodology 7. Management Information Systems requirements and so on. A typical example for Group and Sub-groups are explained in detail later in this white paper with the ACCOUNTS to be operated under Sub-groups.

10 | P a g e

5. What are ACCOUNTS and its Importance?

Accounts (Say Rent Account, Building Account, Sales Account, Inventory Account, Bank Overdraft Account etc.) are the area where all the transactions/events of financial nature occurring in the business/operation are recorded. This Account in turn linked to Sub-Groups and Sub-Groups are linked to Main Groups (Asset, Liability, Income and Expenses). In any Enterprise Resource Planner (ERP) first they decide the Main Groups and then Sub-Groups and link the various Accounts to the respective Sub-Groups with a NUMBER SEQUENCE to it with some methodology to differentiate between each other and for easy operation in ERP.

11 | P a g e

6. Numbering Methodology
Using account numbers allows your Company the most freedom of Company and arrangement of your account format in your financial reports. By using numbers, you can arrange reports into meaningful Main Groups and Sub-groups as per the prevailing Accounting Guidelines in the Countrys Accounting Governing Bodys specifications and the factors affecting the Sub-groups as explained in Sub-groups of Accounts. Typical example for Small Scale Industry is illustrated below: 10000 19999: Assets ------------------- MAIN GROUP 10000 14999: Current Assets ---------------------- SUB Group * 10000 10999: Cash * 11000 11999: Receivables * 12000 12999: Inventory * 13000 14999: Other Current Assets 15000 19999: Noncurrent Assets ---------------------- SUB Group * 15000 15999 Fixed Assets * 16000 19999 Other Assets 20000 29999: Liabilities ------------------- MAIN GROUP 20000 25999: Current Liabilities ---------------------- SUB Group * 20000 20499 Accounts Payable * 20500 20999 Credit Cards * 21000 25999 Other Current Liabilities * 21000 21999 Accrued Expenses * 22000 22999 Payroll Liabilities * 23000 23999 Debt, Current Portion * 24000 24999 Capitalized Leases, Current Portion * 25000 25999 Other 26000 29999: Noncurrent Liabilities ---------------------- SUB Group * 26000 26999 Debt, Noncurrent Portion * 27000 27999 Capitalized Leases, Noncurrent Portion * 28000 29999 Other 30000 39999: Share Holders Equity ---------------------- SUB Group * 30000 30999 Capital Stock * 39000 39999 Retained Earnings

12 | P a g e

Revenue: 40000 59999 ------------------- MAIN GROUP * 40000 49999 Sales 50000 59999: Cost of Goods Sold ---------------------- SUB Group * 50000 50999 Materials * 51000 51999 Labor * 52000 52999 Subcontractors * 53000 53999 Equipment * 54000 59999 Other Direct Costs 60000 89999: Expenses ------------------- MAIN GROUP * 60000 69999 Cost of Production * 70000 79999 Selling Expenses * 80000 89999 General and Administrative Expenses 90000 99999: Other Misc Codes---------------------- SUB Group * 80000 89999 General and Administrative Expenses 100000: NET INCOME/LOSS---------------------- Total Revenue minus Expenses The Company may have several Accounts in the above mentioned Number ranges depending upon their requirements. The numbering convention is designed with ample space left for the addition of new accounts in the future. Example: 80000 89999 General and Administrative Expenses 80001 Printing and Stationery 80002Power and Fuel 80003Water 80005Rent 80006Consumables and Spares 80007Bank Interest and so on.

13 | P a g e

7. Basic Reporting in Accounting

All reporting in Accounting picked from the Chart of Accounts Main Groups and Sub Groups Totals. In fact, Chart of Accounts is built to cater the needs of the Reporting as explained in Introduction part to meet the requirement of Share Holders, Owners, General Public and Government. 7.1. Trial Balance A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure the entries in a company's bookkeeping system are mathematically correct. Example: Frequency may be Monthly, Quarterly or yearly i.e. Trial Balance for the period 1st April, 2010 to 30th April, 2010

7.2.

Profit and Loss (Income) Account

A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Example: Frequency may be Monthly, Quarterly or yearly i.e. Profit and Loss (Income) Statement for period 1st April, 2010 to 31st March, 2011. The Profit and Loss (Income) Statement must follow the following formula: Revenue (Income) Expenses = Net Profit/ Net Loss --- which will be added to Share Holder/Owners Equity in Balance Sheet.

7.3.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. Example: Balance Sheet as on 31st March, 2010. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders' Equity (Includes the Net Result of P/L Account i.e., Net Profit/Net Loss) Each of the three segments of the balance sheet will have many accounts within it that document the value of each. Accounts such as cash, inventory and property are on the asset side of the balance sheet, while on the liability side there are accounts such as accounts payable or long-term debt. The exact accounts on a balance sheet will differ by company and by industry, as there is no one set template that accurately accommodates for the differences between different types of businesses.

14 | P a g e

8. Chart of Accounts Design/Mapping in ERP-Microsoft Dynamics Nav

2009
The mapping of Chart of Accounts in any ERP differs in the methods they use to create, update and incorporate, but result out of it shall meet the requirements of the Companys, Accounting Statutory body and statutory requirements, all put together. Typical Design for MS Dynamics Nav 2009 is as follows:
Code and Description Income/Balance Account Type Totaling

10000 19999: Assets 10000 14999: Current Assets * 10000 10999: Cash * 11000 11999: Receivables * 12000 12999: Inventory * 13000 14900: Other Current Assets * 14999: Current Assets Total 15000 19999: Noncurrent Assets * 15000 15999 Fixed Assets * 16000 19990 Other Assets * 19998: Noncurrent Assets Total * 19999: Assets Total

Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet

Begin-Total Begin-Total Posting Posting Posting Posting End-Total Begin-Total Posting Posting End-Total End-Total

10000..14998

15000..19998 10000..19998

20000 29999: Liabilities 20000 25999: Current Liabilities * 20000 20499 Accounts Payable * 20500 20999 Credit Cards * 21000 25999 Other Current Liabilities * 21000 21999 Accrued Expenses * 22000 22999 Payroll Liabilities * 23000 23999 Debt, Current Portion * 24000 24999 Capitalized Leases, Current Portion * 25000 25990 Other * 25999: Current Liabilities Total 26000 29999: Noncurrent Liabilities * 26000 26999 Debt, Noncurrent Portion * 27000 27999 Capitalized Leases, Noncurrent Portion * 28000 29990 Other * 29999: Noncurrent Liabilities Total

Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet

Begin-Total Begin-Total Posting Posting Posting Posting Posting Posting Posting Posting End-Total Begin-Total Posting Posting Posting End-Total

20000..25998

26000..29998

15 | P a g e

30000 39999: Share Holders Equity * 30000 30999 Capital Stock * 39000 39990 Retained Earnings * 39998: Share Holders Equity Total * 39999: Liabilities Total

Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet

Begin-Total Posting Posting End-Total End-Total

30000..39997 20000..39998

Revenue: 40000 59999 40000 49999: Sales * 40000 49990 Sales * 49999: Sales Total

Income Statement Income Statement Income Statement Balance Sheet Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement

Begin-Total Begin-Total Posting End-Total

40000..49999

50000 59999: Cost of Goods Sold * 50000 50999 Materials * 51000 51999 Labor * 52000 52999 Subcontractors * 53000 53999 Equipment * 54000 59990 Other Direct Costs * 59998: Cost of Goods Sold Total * 59999: Revenue Total

Begin-Total Posting Posting Posting Posting Posting End-Total End-Total 5000059997 40000..59998

60000 89999: Expenses 60000 69999 Cost of Production * 60000 69990 Cost of Production * 69999: Cost of Production Total

Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement

Begin-Total Begin-Total Posting End-Total 60000..69998

70000 79999 Selling Expenses * 70000 79990 Selling Expenses * 79999: Selling Expenses Total

Begin-Total Posting End-Total 70000..79998

16 | P a g e

80000 89999 General and Administrative Expenses * 80000 89990 General and Administrative Expenses * 89999: General and Administrative Expenses Total

Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement Income Statement

Begin-Total Posting End-Total 80000..89998

90000 99999: Other Misc Codes *90000 99990: Other Misc Codes 99999: Other Misc Codes Total

Begin-Total Posting End-Total 90000..99998

100000: NET INCOME / LOSS

Total

40000..99999

The above design is done as per MS Dynamics Nav 2009 ERPs format and either it will be updated in the ERP by following the procedure as per ERP. Likewise each ERP will have their own methodology to load the COA, result out of it shall meet the requirements of the Companys, Accounting Statutory body and statutory requirements, all put together, as explained/discussed above in various steps. Transactions/events of financial nature are posted in MS Dynamics Nav 2009 ERP in the following ways: 1. Direct Posting 2. Posting through Posting Groups For details on posting setups please refer the Knowledge Base Article: Posting Groups Functionality in NAV.docx published earlier.

9. References:
www.icai.org www.investopedia.com wikipedia.org

---End of Document---

17 | P a g e