A properly formulated Chart of Accounts allows you to analyse your company's activities, but the level of this analysis is limited. For example, it may allow you to analyse your sales and cost of sales by type of Item, but you will not also be able to analyse them by geographical area, type of business, salesperson or department.

Normally, a typical business will require three basic levels of analysis:

  • 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 illustrated using a three-dimensional table:

In traditional accounting systems, each accounting transaction will be classified using the Chart of Accounts. A Chart of Accounts is a list of Accounts. By definition it is one-dimensional. Through various means, Accounts in this list will be 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 information 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 partial solution. The only logically viable solution to truly multi-dimensional accounting is to use an "Object" classification in each accounting transaction. Using this method, the Chart of Accounts will contain account specifications for the kind of revenue, expenditure, asset, liability or equity, while the Objects will represent the remaining information (i.e. cost type, department, project, product etc). Each accounting transaction will consist of an Account Number, an amount, a date, and one or more Object classifications. Referring to the illustration above, a wages payment for selling radios in Unit B would contain the following information:

Number    970001
Date    010114
Account    300 Wages & Salaries
Text     "Any written description"
Amount    Debit 15420.25
Objects    Unit B, Audio Sales

This Object classification makes it simple to show every transaction entered for each product, unit and cost type, and to produce separate profit and loss statements for each section of the business (e.g. to show the profitability of Unit B and of Audio Sales).

The use of Objects is not limited to Income and Cost Accounts. You can use Objects with all types of Accounts, including Asset, Liability and Equity Accounts.

Click here for a description of how you can use Objects in Standard ERP to obtain the information and analysis that you need to improve the efficiency of your business.


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