AA is a consulting firm. There are about 300 consultants in different areas of specialisation. , such as business strategy, market survey, business
processing reengineering, and IT consulting. The current accounting system produces report on total revenue & costs. However, the managing director wants the accountant to report the profitability of each specialization area. An extract of the chart of accounts is produced as follows:
Account Code Name
2 Salary Cost
Suggest changes to the chart of accounts so the info required by the director can be produced by the accounting system.
What changes would you propose if the accounting info system needs to report on financial data other than total revenue and cost?
The question describes a very simple chart of accounts. Even the most simple company will need a chart of accounts with considerably more number of accounts. To begin with the company must have accounts in the categories of assets and liability, in addition to the two categories already covered - that is revenue (or income) and cost. Also each of these major types of accounts will have multiple account heads. Preparation a complete list of accounts, even an illustrative one, requires much more information than is available in the question. Therefore, I will cover in my answer only general principles using the two accounts heads as examples.
The company need to classify its revenues under different heads depending upon the nature of its operations and the nature of planning and control desired. For example, the AA consulting firm would like to analyze its results according to areas of specialization. In addition, company may receive amounts from customers under different heads like consulting fees, market research charges, taxes and expenses.
The costs of AA consulting also have many more heads than salary - for example, travel, training and office expenses. The salary itself may be classified in different components such as fixed salary and commission. Further The company desires to have profits of each specialization analyzed separately, therefore it will be necessary to separate salary costs of consultants with different specialization.
To take care of these various requirement the company can adopt the following measures.
- Have an accounts code of three digits, instead of just one digit as at present.
- Allot different blocks of account codes to different types of accounts. For example, 100 to 199 to income accounts, 200 to 299 to expense accounts, 300 to 399 to assets accounts, and 400 to 499 to liabilities accounts.
- Assign further smaller blocks of accounts code to groups of account heads and/or specialization. For example, Within income accounts 110 to119 could be assigned to consulting fees. And then within this group separate accounts can be assigned to separate specialization. For example, 111 for consulting fees - company strategy, 112 for consulting fees - market survey, and so on.
- Once the accounts have been defined and coded in this way, it will be possible to identify and ascertain the revenue and costs for each specialization, and based on that profit for each specialization can be calculated.