Which of these are very important to an international corporation? Choose one. Local subsidiaries Reporting and early warning systems. Sales data and accounting programs
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Answer:
The chart of account (CoA) is one of the most important structures in business. It reflects all the activities a business is involved in and it provides a foundation for the majority of financial and management reporting. Correct use of the chart of accounts can both simplify operations and improve decision making capability.
Often on accounting projects, there is a gap between accounting expertise and systems expertise, this can result in a poor CoA design. This can easily be overcome by understanding the historical context and modern-day principles that surround the CoA. We can then better understand the implementation options in systems such as SAP ERP or S/4HANA. This article will look at three topics:
Part I: Accounting: history & modern principles;
Part II: CoA settings in SAP ERP (from R/3 to S/4HANA);
Part III: Common pain points and improvement initiatives.
Part I: Accounting: history & modern principles
Ancient civilizations had accountants!
To fully appreciate the general ledger concept and the CoA we need to step back over 500 years to the origins of accounting and the first documentation of double-entry bookkeeping.
The exact origin of accounting is not known, but basic practices are evident as far back as 2800 B.C. with the Sumerians. These ancient inhabitants of Mesopotamia (modern-day Iraq) were one of the first major civilizations in the world. One of their biggest cities was Uruk; with a population of between 40,000 and 80,000 people. It’s easy to imagine this as a bustling centre for trade at the time.
The Sumerians developed a wedge-shaped script called “Cuneiform” consisting of several hundred characters that scribes would mark on wet clay and then bake. This is thought to have been used to keep records of business transactions (source). The diagram below shows an early bill of sale written in cuneiform. This record-keeping could be considered an early form of accounting.
a bill of sale written in cuneiform
A friend of Leonardo da Vinci
Accounting in the above form has been found throughout history, it’s mentioned in the Christian Bible, and the Quran.
The shift from simple record keeping to modern accounting depends on the concept of double-entry bookkeeping. It’s unclear exactly when this was first used in practice. The earliest recorded documentation is found in the following two books:
Della Mercatvra et del Mercante Perfetto (On Trade and the Perfect Merchant) by croatian merchant named Benedetto Cotrugli, written in 1458 (link)
“Summa de arithmetica, geometria, propotioni et proportionanlit (Summary of arithmetic, geometry, proportions and proportionality) by Fru Luca Pacioli; a close friend of Leonardo da Vinci, first published in Venice in 1494 (link)
The work by Pacioli is quite complete in that it describes a system of accounting that resembles closely the modern-day approach. It’s thought that a lot of what he describes was already in use by merchants and traders at the time.