Creating a Modern Chart of Accounts for Your ERP Implementation Project

Implementing a new ERP system is a prime opportunity to modernize your chart of accounts (COA). In this article, I will share strategies and insights to help you create a streamlined and effective COA for your Microsoft Dynamics 365 project.

Please consult with your auditor or tax consultant for personalized advice.

Preparing Your Future State Chart of Accounts

Assessing Organizational Needs

Before we start, it is crucial to step back and assess the organization's needs. Ask yourself what type of chart of accounts you are looking to create. A global shared chart of accounts that will be leveraged by multiple legal entities worldwide? Or, is it just a local version? Some countries, like Spain or France, mandate the use of a specific legal chart of accounts. In others, like Germany, industry standards are set by organizations such as DATEV.

Ultimately, you need to determine what your organization requires and ensure your chart of accounts complies with local legal standards.

If you need a global chart of accounts and also want to use it in a country where local accounting laws mandate the use of a specific version of a COA, let me know in the comments. There is a cool trick to achieve this!

Cleaning Up Existing Accounts

Your second preparation task after determining your actual needs is to review your current chart of accounts, specifically cleaning it up. Over time, organizations accumulate accounts that are no longer required. Analyze which accounts are no longer needed in the near future. Follow this process:

1. Find out how many and when was the last time a transaction was posted against your accounts.
2. Separate accounts without transactions for the last years.
3. Analyze what type of transactions have been posted to these accounts and why it stopped.
4. Discuss internally if a removal is appropriate.

Don't Forget About the Mapping

Whenever you create a new version of a chart of accounts, you will need to map out the old account ID to the new one. This is necessary when you migrate your general ledger balances. Want to know how to migrate balances? Check out my other posts!

A Complete Guide to Importing Financial Balances into Dynamics 365 Finance

Identifying Reporting Requirements by Leveraging Your Existing Chart of Accounts

Over the last decade, financial reporting has evolved significantly, from SRS reporting to management reporter tools, business analytics, and now AI. It is essential to identify your organization's reporting needs, KPIs, and transaction requirements. The old chart of accounts can provide insights into current reporting practices. For example, an account named "Revenue South America Parts" indicates interest in revenue data for specific regions and items. Modern ERPs may not require such accounts, but they highlight reporting needs.

This kind of account won't be necessary in modern ERPs, but it is important to note that someone in the organization is interested in knowing the revenue of parts in a specific region. This is just a simple example, but we will be streamlining the chart of accounts, which will eliminate the option to record transactions at a detailed level in the general ledger. If you need more detailed analysis, you could look into one of the above-mentioned reporting tools.

With your reporting needs identified, you should also consider analyzing financial dimensions in a Microsoft Dynamics product, or ensure that you can get your financial reports with the help of BI specialists.

Microsoft Documentation - Financial Dimensions

Designing a Modern Global Chart of Accounts

Now that you have completed the preparation steps, let's get into designing your future state chart of accounts.

Assign Logic to Digits

When you think about your future state chart of accounts, one of the biggest goals you want to achieve is to create a new version that is easy, understandable, and logical. To achieve this, many organizations assign a logic to the numeric digits. Depending on the industry, obviously, this logic varies. But the first digit is mostly universal...

If you are wondering what statistical accounts are, the controlling department may want to include transactions to GL accounts for alternative calculations such as a derived version of asset depreciation.

Moving on to the next digits, this is where you need to define your specific logic. As an example, let's deep dive into the cash/banking area. The second digit in the assets range can be determined, for example, 1100 for cash and cash equivalents, 1200 for accounts receivable, ...

Detailed Example: Bank Accounts

In the cash and cash equivalents area, the third digit allows for further differentiation, especially in large organizations with multiple bank accounts and legal entities.

And this is where it gets interesting. Let's continue this example with the banks. Large organizations will have different bank accounts in multiple legal entities of different types and currencies. One approach I really liked from a previous client was to give the asset/cash & cash equivalents its logic. The third digit equals currency, such as USD, EUR, or GBP. The fourth digit equals the type of bank account, including checking, investment, fixed-rate, or hedging account. The fifth and sixth digits leave space to have multiple of those accounts.

Oh, and because the assignment of the subledger bank account in Dynamics 365 is variable based on the legal entity, you can assign the account (e.g., 112101) to multiple legal entities to single bank accounts. So please do not link the actual bank account number to the name of the bank account like "Asset-Cash-EUR-JPMorgan-43234214".

Foundation and Extensions: Optimal Digit Length

A good chart of accounts should have as few digits as possible while meeting all the reporting needs and leaving some margin for extensions. Especially nowadays where reporting can be done with BI tools and leverage subledger data, the length of the digits has shrunk. Nevertheless, six digits suffice, with larger organizations using up to eight digits. The last two digits should be reserved for extensions or local legal requirements.

Effective Use of Descriptions

Descriptions are crucial for helping people find the right account and avoiding unnecessary account creation. Descriptions can incorporate logic, such as indicating whether an account is for asset-cash, euros, etc. If you look at the above table in the description column, you see based on the description exactly where this account resides. Sometimes less versatile financial users will rely on the description other than the account ID. Keep that in mind.

Utilizing Dimensions to Enhance the Chart of Accounts

Minimizing Redundancy

A common mistake is subdividing account types into unnecessary dimensions. For example, instead of creating separate main accounts for office equipment at different locations, use a financial dimension for cost centers or departments. For intercompany transactions, use two accounts—one for accounts payable and one for accounts receivable—and a financial dimension to determine the transaction counterpart. I remember my first job as an accountant and seeing all the possible combinations in an organization with 25 legal entities. The chart of accounts there read like this:

• AP Legal entity A/B,
• AR Legal Entity A/B,
• AP Legal Entity B/A,
• AR Legal Entity B/A.

Holy moly. Nowadays, you just need one account for AP and one for AR intercompany. Then use a financial dimension "Intercompany" to determine the counterpart of the transaction. Same with the cost center; if you have that dimension, then you don't need to fix the cost center at the main account level.

Conclusion

By carefully assessing your organizational needs, cleaning up outdated accounts, and designing a logical and flexible COA, you can ensure your ERP implementation meets modern reporting requirements and supports business growth. If you have additional suggestions, feel free to share them in the comments. I will update this article with more insights as I encounter them. Thank you for reading.