Standardize the chart of accounts

A standard chart of accounts is a formal list of the accounts used in the general ledger of a business. When a business acquires another company, the new subsidiary always has a chart of accounts that differs from that of the acquirer. If the acquirer does not impose its own chart of accounts on the acquiree, it must go through a mapping process at the end of each reporting period to determine which acquiree accounts correspond to its own accounts. The mapping is then used to consolidate the results of the entities and produce financial statements.

The same problem arises when a corporate parent allows any subsidiary to maintain its own chart of accounts. This is an insidious problem, for it means that any number of corporate subsidiaries may be continually altering their charts of accounts, making it extremely difficult for the corporate accounting staff to consolidate financial statements. This a particular problem when there are hundreds or even thousands of accounts that must be consolidated.

The best solution is to create a company-wide chart of accounts and force every subsidiary to use it, without any allowed variations. By doing so, the mapping problem is eliminated, making consolidations much easier to complete.

A perfectly standardized chart of accounts is certainly the ultimate goal for the corporate accounting staff, but it does not meet with such universal approval among the accounting staffs of the subsidiary businesses. These other organizations may have substantially different operations than that of the corporate parent, and so need to store information in other accounts. In such situations, at least require each subsidiary to formally notify the corporate parent whenever it is creating a new account, so that the parent’s accounting staff can develop a proper account mapping in advance of closing the books. A less intrusive approach is to supply each subsidiary with the parent’s official chart of accounts, and require the subsidiaries to map their results to that chart of accounts before forwarding their information at month-end. However, this latter approach relies on the ability of each subsidiary to consistently map its accounts to the corporate chart of accounts over time, which may not be the case.

The most comprehensive way to ensure that a standardized chart of accounts is used is to operate a centralized accounting system, which all subsidiaries must use for their day-to-day transactions. This approach gives the corporate accounting staff complete control over the accounts being used, and how they map to the corporate-level accounts. Of course, centralization also requires a lengthy implementation and considerable expense, which can be difficult when a company is a serial acquirer. Doing so also mandates that subsidiaries give up their local accounting systems.

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