As you navigate through your career in SAP FICO & Accounts & Finance you will invariably come across Chart of Accounts (COA) every now and then. To know the basics and more about COA read on…
Chart of Accounts
Chart of Accounts is the backbone and foundation of Accounting information classification (Accounting) and presentation (Reporting).
GL Account Groups and Sub Groups
General Ledger (GL) Accounts form the bricks for building the COA superstructure. As you build the living room, dining hall, kitchen and bedroom for your home you need GL Accounts into a grouping structure. In other words, GL Account Groups and Sub Groups form the Chart of Accounts structure.
COA Groups Structure is decided based on
- External – statutory reporting requirements
- Internal – business locations, departments, product groups, market segments
GL Account Groups for Balance Sheet
- Fixed Assets,
- Current Assets
- Current Liabilities
- Long-Term Liabilities
GL Account Groups for Profit and Loss
- Income Accounts
- Direct Expenses
This is only narrative, you will find more groupings in practice.
Sub Groups are subclassifications under the given Group. Example of Sub Groups under Current Assets main group:
- Loans and Advances
- Cash and Bank
Here we say two levels of Grouping. You will see more levels depending on the size of the organization and complexity of the business.
Groups and Sub Groups come in handy to generate summarized financial reports- Balance Sheet and Profit and Loss Account. Summarized financial reports with comparative figures say Current Year and Previous Year will enable the user of the report to quickly see major deviations. For example, you are interested in knowing the two years Current Assets, a Balance Sheet report generated with First Level GL Account Groups helps.
Summarized Financial Reports save time to further focus only on exceptions.
Sub-Ledger and Control Account
An organization transacts business with outsiders also known as business partners for purchasing of goods and services, sales and so on. So it becomes necessary to keep a record of say all the purchases and payments with a party in an Account. All such party accounts will be grouped as Vendors and will be recorded separately as Vendor Sub Ledger. A Sub Ledger is a separate component of a computerized Accounting system. Here we need to link the Vendor Sub Ledger to GL. A special Account called Control Account is defined in GL. Yes, Control Account is the linking pin between all the Vendors in Sub Ledger and the GL!
So what is unique about a Control Account? No direct postings allowed! Systems posts an entry as and when a purchase, payment or other adjustments is recorded in one of the Vendor Account in the Sub Ledger. You will now know that the net total of all the Vendor Sub Ledger Accounts should exactly match the related GL Control Account.
Like Vendors Sub Ledger, there is a Sub Ledger for Customers and a corresponding GL Control Account in the Chart of Account.
GL Account Codes and Description
Every GL Account has two parts, Code, and Description. The code is used by the computer system to identify the GL Account and is unique. Codes can be numerical and alphanumerical. Numerical codes are used by most systems. These codes have a predefined number of digits.
The description is for the reader to infer what the GL Account stands for.
An example can be 600410 Printing and Stationery.
An ERP environment is characterized by information capture and record at the origin of the transaction event. For example, Sales is recorded in Sales and Distribution (SD) Component of the ERP system by Sales Department of the organization. SD component is designed to provide complete support for all related functions of Marketing, Sales and Distribution.
Sales Account in GL in an ERP environment is designed with Control Account Properties, accepting entries only from Sales and Distribution Component.
You will find more GL Accounts act like a Control Account that accepts entries only from the related systems such as Asset Accounting, Personnel Accounting and Materials Management.
SAP and Chart of Accounts
By design, SAP differentiates between external statutory reporting and internal management reporting. So the COA under SAP environment is predominantly designed to serve external reporting requirements. Internal management reporting is handled in Controlling Component via Primary Cost Elements which are in many respects like GL Accounts.
To know more about the basics of SAP Internal and External Reporting, please read the post ‘Cost Element Basics You Should Know!.
Thank you for your time reading the post. Have you found this article helpful in grasping the concept behind Chart of Accounts?
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