An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.
Allocation is the act of distributing according to a plan. As per the dictionary allocate means to set apart for a special purpose; designate; distribute according to a plan. From an accounting context, it means a system of dividing overhead expenses between the various departments of a business. Figuratively, earmarked is often used in regard to monetary allocations although it is heard in other contexts as well.
The allocation also refers to a piece of the pie, a share in the profits, a portion of whatever is being divided up and parceled out usually money, but in an accounting context is applicable to account balances. This expression probably has its origin in the graphic representation of budget allotments in circular, pie-shaped form, with various sized wedges or pieces indicating the relative size of allocations to different agencies, departments, etc.
Mass allocations is a functionality offered by many automated systems and ERPs to distribute the account balances from one account to several others based on a formula or mathematic logic. Users can define a Mass Allocation formula to create journals that allocate revenues and expenses across a group of cost centers, departments, divisions, locations, and so on using any accounting dimension available. Users can include parent values in allocation formulas that can enable allocating to the child values referenced by the parent without having to enumerate each child separately.
The commonly used allocations can be grouped as follows:
Allocations can be used in various practical business situations. For example, consolidated rent paid can be allocated to another division based on the area of usage, or, a pool of marketing costs can be allocated to several departments based on the ratio of department revenues to total revenues. Some of the commonly used examples are:
In the example shown in the figure, we have a company which has taken a 1000 square feet office space on rent. The expenses for rent are borne by the head-office and payment to the landlord is also made by the head office. To know the true profitability of each of the departments (Department A, B & C) the rent needs to be allocated to each one of them.
Each department occupies different areas and the company has taken the measurement of the areas occupied by each of the departments. In the example shown here, the rent is being allocated to different departments based on their usage factor. This is an example of the concept of allocation and automated accounting systems help handle complex allocations programmatically.
Recurring Journals are for transactions that repeat every accounting period and allocation Journals are for single journal entry using an accounting or mathematical formula to allocate revenues and expenses across a group of accounting dimensions like cost centers, departments, divisions, locations, or product lines depending upon usage factors.
Business Metrics for Management Reporting
Business metric is a quantifiable measure of an organization's behavior, activities, and performance used to access the status of the targeted business process. Traditionally many metrics were finance based, inwardly focusing on the performance of the organization. Businesses can use various metrics available to monitor, evaluate, and improve their performance across any of the focus areas like sales, sourcing, IT or operations.
This article explains the process of entering and importing general ledger journals in automated accounting systems. Learn about the basic validations that must happen before the accounting data can be imported from any internal or external sub-system to the general ledger. Finally, understand what we mean by importing in detail or in summary.
Understand what we mean by GAAP to STAT adjustments. This article discusses the different standards that are used for multiple representations of the financial results for global organizations. Understand the meaning of US GAAP, Local GAAP, STAT, IFRS, and STAT. Finally, understand why accounting differences arise and how they are adjusted for different financial representations.
Five Core General Ledger Accounts
Typically, the accounts of the general ledger are sorted into five categories within a chart of accounts. Double-entry accounting uses five and only five account types to record all the transactions that can possibly be recorded in any accounting system. These five accounts are the basis for any accounting system, whether it is a manual or an automated accounting system. These five categories are assets, liabilities, owner's equity, revenue, and expenses.
Multitude of these legal and operational structures clubbed with accounting and reporting needs give rise to many reporting dimensions at which the organization may want to track or report its operational metrics and financial results. This is where business dimensions play a vital role.
The general ledger is the central repository of all accounting information in an automated accounting world. Summarized data from various sub-ledgers are posted to GL that eventually helps in the creation of financial reports. Read more to understand the role and benefits of an effective general ledger system in automated accounting systems and ERPs.
In this article we will discuss various types of "Management Entities". Various types of operational units, are created by management, to effectively run, manage and control their business. Different types of functional units, and divisional units, are widely used across industry.
Hierarchical Organization Structures
Hierarchical structure is typical for larger businesses and organizations. It relies on having different levels of authority with a chain of command connecting multiple management levels within the organization. The decision-making process is typically formal and flows from the top down.
Internally, an organization can be structured in many different ways, depending on their objectives. The internal structure of an organization will determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities such as the branch, department, workgroup and individual.
GL - Journal Posting and Balances
In this tutorial, we will explain what we mean by the posting process and what are the major differences between the posting process in the manual accounting system compared to the automated accounting systems and ERPs. This article also explains how posting also happens in subsidiary ledgers and subsequently that information is again posted to the general ledger.
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