How Do I Departmentalize My Chart of Accounts?


Departmentalizing refers to breaking your company into different categories or profit centers, so that you can see how each facet of your business is doing. Construction industries often break their company into new construction, retrofit, and service departments, while a grocery store would break it into produce, deli, pharmacy and others, and a computer company might split theirs between new systems, service, and upgrades. All of these different businesses use departmentalization to see how much of their revenue comes from each activity, so they can find problem areas, or expand a highly profitable area. In ESC there are two different ways to departmentalize.

Method #1

The first method of departmentalization simply subdivides each account by department. This allows you to see a summary of the account at any time or a breakdown of how much of that account was assigned to each department. This is the preferred method because it keeps your chart of accounts simple, but still gives you the data you need to check the profitability of each department at any time.

Note: This method is automatically enabled when the ESC Accounting integration is selected.

QuickBooks Integration: QuickBooks uses a function called "Classes" to break sales income and other accounts down, and ESC can send over department information to these classes. Since Classes function exactly as Departments in ESC do, ESC sends over the Department name as a Class in QuickBooks. Class tracking must be enabled in QuickBooks in order for this to work.

Method #2

The second way to departmentalize is the original method devised by accountants to track this information, and it is the method used in Sage 50 integration to track department information. This method also works with QuickBooks and ESC Accounting, but it requires much more work to set up than the previous method and produces the same results.

In this method, each department gets its own sales income account, and might even have sub-accounts under this account to further break out the sales information (for example, labor vs. material vs. other). Each department in ESC is set to target a specific account number appropriate to that department. If sub-accounts are being used for further tracking, then a billing code would be set to point to the proper sales account of a particular type, as the following example illustrates:

First Service has the departments of Residential Install and Commercial Install to track the new construction of air-conditioning systems, Service to track sales related to the repair of systems, Replacement to track the retrofit of existing systems, and Service Agreements to track the sales of maintenance agreements. Under this method of departmentalization, First Service would have a chart of accounts that would appear similar to the following:

Account # Account Name
401000             Residential Install Sales
402000 Commercial Install Sales
403000 Service Sales
404000 Replacement Sales
405000 Service Agreement Sales

First Service would then associate the proper account to the corresponding department in the Sales, Enter Sales Departments screen. They would also make sure that their Billing Codes had no sales debit or credit accounts set up for them, so that the departments could choose the proper accounts for them. If First Service wished to further break down their department information, then they might have an expanded chart of accounts that appears similar to the following:

Account #  Account Name
401000            Residential Install Sales
401010 Residential Install Labor
401020 Residential Install Material
401030 Residential Install Other
402000 Commercial Install Sales
402010 Commercial Install Labor
402020 Commercial Install Material
402030 Commercial Install Other

And so on….

First Service would have to then set each department up in the Sales, Enter Sales Departments screen with the Sales Credit account equal to the department’s material income account number (e.g. 401020 for department 01). This would send the appropriate dollars to the appropriate accounts.

Note that the account numbers are very important in using this type of departmentalization. In ESC, every department has a 2-digit number that is used to identify it. This number must be reference in each of the department’s accounts, as this list emphasizes:

Account # Account Name
401000            Residential Install Sales
402000 Commercial Install Sales
403000 Service Sales
404000 Replacement Sales
405000 Service Agreement Sales

This number becomes extremely important in making sure that the cost accounts do proper departmentalizing. Therefore, the cost accounts for the departments would also be broken into separate areas, as the continuing example illustrates below:

After completing the setup for the sales accounts, First Service must now create the cost accounts that will be used with the departments. They create a list of cost accounts that each department might incur:

Account # Account Name
501000             Cost of Goods Sold, Residential Install
501010 Material Cost, Residential Install
501020 Labor Cost, Residential Install
501030 Other Cost, Residential Install
502000 Cost of Goods Sold, Commercial Install
502010 Material Cost, Commercial Install
502020 Labor Cost, Commercial Install
502030 Other Cost, Commercial Install

And so on….

They could have even broken down the Other cost areas further, into Permits, Freight, etc.

Once the proper accounts for sales and cost have been created, and the Sales Departments set up using the Material sales account for that department, the billing codes and cost accounts can be set up to reach the proper accounts, using something that ESC refers to as XX Codes. The XX Code tells ESC that, whenever it finds an XX in an account number field, it needs to replace that XX with the department number being referenced on the invoice. These XX Codes can be used in the Sales Credit and Cost Debits fields in the Enter Billing Codes screen, and in the Cost Account field in Inventory Setup. The example below helps illustrate how the XX Code operates in ESC:

After finishing its cost account setup, First Service now sets its billing codes and inventory costs to reflect the proper account. They access the labor billing code, and change the Sales Credit account to 4XX010. When this billing code is used, the system will look at the department number associated to the invoice, and replace the XX with that department number. Thus, if the invoice is keyed to department 01, then the resulting account number would be 401010, which, when we look at the sample chart of accounts displayed above, is Residential Install Labor. Likewise, if the invoice was set to department 02, then the account number referenced would be 402010, which is Commercial Install Labor. In a like manner, First Service would pull up the MAT billing code for miscellaneous labor, and change the Cost Debit field to 5XX010, so that department 02 invoices would send their cost to 502010, which is the Material Cost, Commercial Install account. Note that the Sales Credit would be left blank for the MAT code, since the department was already set to point to the Material Sales account for each department. Finally, the Cost Account in Inventory Setup would be changed to 5XX010, so that every inventory part would send its cost to the proper account in the same way the MAT code does.

Now, when an invoice is posted to the accounting package, the sales amounts go to the proper income accounts for the department, and the costs transfer to the appropriate cost account, so that a true reflection of profitability can be seen for each one of your company’s income centers.

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