The foundation of each organization’s accounting system is a chart of accounts. This is a name and number system whereby each account has unique identification in the form of a name and number. If a particular department has accounts in more than one physical location, this becomes part of the structure as well. Accounting systems are built around five categories of accounts, assets, liabilities, equity, revenues, and expenses. Table 1 explains a little about each.
Assets (1000) | Items of value owned. Examples include cash, inventory, and land. Assets are usually tangible, but not always. |
Liabilities (2000) | Debts. Examples include loans and taxes owed. These debts are usually settled by cash payment, but sometimes they are settled by providing a good or service at a later date |
Equity (3000) | Equity represents the owners’ interest in the company. Equity accounts include common stock and retained earnings or profits reinvested in the business, as opposed to profits distributed to stockholders as dividends |
Revenues (4000) | Revenue Increases assets when the organizations output is sold or exchanged for money or otherwise valuable goods and/or services. Examples include sales of equipment, merchandise, or voice and data communications, and any interest earned from investments. |
Expenses (6000) | Expenses decrease assets or increase liabilities when goods and services are acquired and used to fulfill orders and serve customers. There may be literally hundreds of expense categories such as salaries, rent, utilities, advertising, voice and data communications services, taxes, fees, subscriptions to publications, and memberships |
Within each of these categories are subaccounts used to classify each entry or transaction. If the organization does business or maintains a presence with resources—people, address, buildings, telephone number, etc.—in more than one location, the system will also have location information in the form of a name and number. Understanding this structure is vital to successful management practice in any mid-size or large organization. Communications circuits, equipment facilities, and service are as vital to organizational function as space, heating, air conditioning, ventilation, power, water, and rapidly becoming more vital than postage. Communications is not just paying the telephone bill anymore. Where there was, and still is in most cases, a simple single line on in the expense category there should now be at least three, and perhaps four, for each department or cost center requiring use of communications in its operation.
Communications equipment and other assets are accounted for in the asset category. Communications operating expense is accounted for in the expenses category. Accounting for anything to do with communications in the other categories is highly unlikely. If you are, have been, or expect to be given responsibility to manage a department or cost center, you have or will receive monthly summaries of expenses your department incurs. You may or should also know or be aware of investment in or spending for equipment and other assets required for proper operation of the department(s) you’re responsible for and that produce the monthly expense summary or summaries. One of the items in the expense summary is depreciation. This is the result of writing off or expensing the value of the asset against revenue over a period of time. It has the effect of reducing taxes and increasing the amount of cash kept from the revenue stream after all other costs are absorbed during each accounting period.
Spending the organization’s money begins outside the accounting system when a commitment in the form of a purchase order or proposal acceptance is made. To this day, many organizations still place verbal orders for telephone service. But now even the telephone companies are catching on and it’s possible to use their website to place an order for service. Many have had customer order entry systems in place for several years for large accounts. Sooner or later these verbal or computer-based order entry systems cause service delivery and subsequent invoices that are paid and, in most cases, classified by someone in the organization so it fits into the single telephone expenses category.
The expenses category of the accounting system tends to mirror the organizational reporting and management structure. Look at any particular location from headquarters to remote sales offices or stand-alone call centers. What you will see is someone, somewhere in the organization, appointed to be responsible for all expenses incurred during the course of operations at each and every location. Another connection between the system and the organization is in the revenue category and the sales department. Stop and think about it: Is your organization using a website to attract prospective customers and then enabling them to place orders? Where’s the sales representative in this picture? The revenue category in the accounting system must be capturing the revenue numbers somehow, somewhere. What does it take to get the expense category to capture the cost of the Internet access facility?
Depending on the size and number of accounts, larger organizations will have additional subaccounts in a hierarchy of sorts that tends to mirror organizational reporting structure and management chain. For example, revenues would look a lot like the sales and marketing organization. Certain parts of the asset accounts would match production or manufacturing organizations where inventory or facilities churn and change on a daily basis as products shipped undergo the billing process. In communications service provider organizations, the equivalent to production is network operations where facilities are used to support the organization’s service delivery.
The Account Numbering System
The structure of the monthly reporting system is built around unique identifiers for the account and subaccounts in the accounting system’s chart of accounts. At the small end of the scale is the entity that keeps track of its accounting affairs in each of the unique categories: assets, liabilities, equity, revenues, and expenses. At the other end of the spectrum is the large entity with many departments and operational functions located in many locations. At the smaller end of the spectrum are organizations that can easily use two- or three-digit series numbers while the large organization will require three-, four-, or even five-digit account numbers. The same is true for department and location numbers. The key point is to architect the system so that it is expandable and scalable beyond foreseeable growth, while at the same time keeping memory, storage, and processing complexity reasonable.
In addition to the chart of accounts, most modern computer-based accounting systems include, and won’t operate properly without, unique departmental identification and location information. For example, the payroll part of the accounting system needs to know which department to allocate payroll expense to, in addition to knowing which employees reside in cities and states with payroll and income taxes.
The combination of account and subaccount identification, department name and number, and location name and number are the basis for communications expenses and capital investment in our mythical organization’s budgeting and financial planning examples and practices.
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