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Objects

In traditional cost accounting, the classification of expenditure and the allocation of different expenses to departments, products, regions etc. is a well-known problem area. In essence, there is a need to present management reports in several different views or dimensions. Normally, there are three basic dimensions used in the accounting of any business:

• The KIND of income or expense - material, labour, transport, telephone etc.
  

• The COST CENTRE, i.e. the department or organisational unit that carries the responsibility for incurring the expense or realising the revenue.
  

• The COST BEARER, normally the output, product or service produced.

In some businesses, there is a requirement to add further dimensions that are not subdivisions of the above, such as geographical areas.

Conceptually, the accounting situation can be described as a three-dimensional table:

In traditional accounting systems, the classification is done with the help of the Chart of Accounts. A Chart of Accounts is a list of Accounts. By definition it is one-dimensional. Through various means, the Accounts are divided into sub-classes down one or more levels, and the result is a hierarchical tree structure of classifications.

A result of the hierarchical tree structure classification is inevitably that cost type, profit centre and cost bearer classifications are scattered all over the Chart of Accounts. This makes the description of reports complicated and cumbersome, since data will have to be picked up individually from many different Accounts, in order to produce different types of "Functional" result reports.

To simplify the structure many accounting systems subdivide the "account string" into different parts, each indicating cost type, department, project, product etc. This is only a half-way solution. The only logically viable solution to truly multi-dimensional accounting is to use an "Object" classification in each accounting transaction. With this method, the Chart of Accounts contains account specifications for the kind of revenue, expenditure, asset, liability or equity. Each accounting transaction consists of an Account Number, an amount, a date, and one or more Object classifications. In the example above, a wages payment for selling radios in Unit C would contain the following information:

Number:    970001
Date:    010105
Account:    5102 Wages
Text:    "Any written description"
Amount:    Debit 15420.25
Objects:    Unit C, Radio

With this classification, it will be simple to show all transactions entered for a separate product, unit and cost type, or to show a profit and loss statement for a particular section of the business.

Click here for a description of how FirstOffice deals with this task.

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