Chart of Accounts Domain in Master Data Management

Chart of Accounts Domain in Master Data Management

A chart of accounts (COA) is a list of accounts used by an organization to define each class of items for which money is spent or received. It is used to organize the finances and segregate expenditures, revenue, assets, and liabilities to give everyone a better understanding of the financial health of the organization.

There are many different types of accounts. Typically, we see the asset accounts, liability accounts, equity accounts, income, and expense accounts.

Traditionally, account management is done by requesting and managing the flow through emails or calls. Mappings between accounts are typically done in spreadsheets, causing a lot of manual and error-prone work. There is no automated versioning, making it hard to understand what changes were made, when, and by whom. Also, there is no easy way to see departmental view for sales or finance if they want to see a consolidated view by respective departments.

Depending on how large an organization is, it may end up with thousands of accounts to support its operations. In organizations where the global financial landscape is complex, I’ve seen two hundred thousand cost centers, fifty thousand accounts, and multiple general ledgers. This is especially true in financial services, healthcare, and other highly regulated companies. Even though COA data is relatively smaller compared to other types of business-critical data, it can pose unique challenges due to its low tolerance level for poor data quality.

You must consider managing COA as one of the core master data domains. By implementing COA in a Master Data Management (MDM) system, you can manage the accounts as a catalog of hierarchically ordered reference data. COA heavily leverages hierarchy management capabilities of MDM.

Each account in the chart of accounts is typically assigned a name, a brief description, and a unique identification number. Account numbers usually follow a nomenclature to show a division of the company, the department, the type of account, etc. Further, the accounts can be organized by business function and/or divisions.

There are more reasons to master COA than not. Mastering COA data allows you to:

Centralize the creation and distribution of accounts, cost centers, legal entities, etc., in your organization
Follow consistent standards across the organization for account management
Ensure alignment across divisions and avoid discrepancies in financial reporting to ensure balances are correct in quarterly and year-end reports
Gain a granular view of the business and group financial data in different ways during planning and forecasting
Ensure the right degree of consistency and alignment
Flexibly make changes and streamline account changes across general ledgers
Evaluate advanced what-if scenarios during mergers and acquisitions and forecast impact
Remove fragmented account management systems as a result of mergers
Conduct impact analysis of organizational changes you want to make by creating different versions of hierarchies
Ensure sales commissions get paid correctly
Connect employees to cost centers
Better manage the provisioning process

The ownership of COA master data typically stays with the finance department and often by each business unit’s finance team.

By centralizing the management of Chart of Accounts, an organization can gain multiple advantages as discussed above.

MDM Geek’s Recommendations for COA MDM:

Understand the MDM capabilities required for a successful COA MDM.
Select a tool with a proven record of mastering COA data along with multidomain capabilities. It’s important that the COA domain is connected to the employee, partner, agency, and other domains.
Review projects that touch COA master data. Separate the requirements related to COA and create a new stream focused on the implementation. For the most part, this can run independently of other projects.
Business analysts in finance are the primary users of the system. Ensure your MDM helps them define, create, and manage account hierarchies.
You need an ability to manage the mapping between accounts in various systems and create different versions of account hierarchies
The COA data may be widely distributed to data warehouses and other reporting systems. MDM should allow you to export COA data through a time-boxed process, with a defined cadence.

Hope this blog provides you with a good overview of COA Master Data and what to keep in mind while implementing COA MDM. If you have questions, reach out to me @mdmgeek. Love to hear your comments.

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