Accounting Lesson: Natural Accounts

Preface:

One part of my job is communicating accounting-related information to non-accounting people... A task that is not necessarily simple or easy. For one thing... accountants talk jargon: debits, credits, chart of accounts, depreciation, accrual, assets, liabilities-??? and that's just the beginning...

In order to explain a topic in "normal people" English, I have to have a thorough understanding of the subject matter myself... and that is part of what keeps my work challenging.

I spend hours thinking through how things work, why they work that way, how the process may be perceived by users, how we can improve the process in the future, what parts of the process are non-negotiable (and which parts can be adjusted case-by-case). Though it takes generous amounts of time and energy, the thinking part of work is usually not as exhausting as the communicating part.

For every hour I spend in the initial jargon-to-normal thought world, I spend multiple hours in the basic-explanation/communication world. I compile screen shots, scan hand-drawn diagrams, simplify official statements and codes, talk through ideas with coworkers, and wrestle with words to try to bring at least a little more clarity to an itty bitty segment of the non-finance-focused majority of the world.

Since many of the people I interact with at work are scattered across the globe, I rely on digital communication methods. Each week, I spend hours upon hours writing hundreds of emails (usually not more than 40 a day). I also regularly have skype meetings with folks a few time zones away.

One of the recent pieces of our office's migration in the financial world is a shift in how expenses are tracked. Part of my job is communicating our shift from the old-style relational-category-type-approach (well, more of a mixture of multiple approaches) to a 100% natural account method for tracking reimbursable business expenses.

Are you ready for a simple accounting lesson?
Here we go...

{for starters, I've chosen a (large) healthy, colorful picture to aid with digestion}

photo compliments of Google

In the old, pre-natural world, expenses could be assigned to an expense account based on relationships. In the current, natural world, expenses are filed by their specific type of expense-- not because of their connection to another account or a more general category.

Scenario:
Say you just returned from a business conference in Brazil. The conference had fees of its own, plus you spent money related to your travel to and from the conference, oh... and you had to eat and sleep along the way as well. You returned to the home office with a great suntan and an envelope bursting with receipts to submit to your employer for reimbursement.


#1 OLD Method (assigning expenses by relationship)

Your account choices are:

1200 Conference Expense
1300 Office Supplies Expense
1400 Utilities Expense
1500 Staff Party Expense

Since all your receipts were related to your conference, you code all the receipts to "Conference Expense" (#1200). It doesn't matter that some expenses were from different parts of your trip (conference fees, taxi, airline tickets, multiple meals)., because all of the expenses were related to the cost of attending the conference.

Easy, right?



#2 {new} Natural Account Method

Your account choices are:

1200 Conference Fees Expense
1300 Office Supplies Expense
1400 Utilities Expense
1500 Staff Party Expense

1600 Staff Travel Expense
1601 Airfare
1602 Taxi
1603 Train/Metro
1604 Parking and Tolls
1605 Travel Meals
1606 Lodging
1607 Other Travel Expenses

In this scenario, the only expense you charge to Conference Fees Expense (#1200) is the actual cost for attending the conference. Your hotel expense is charged to Staff Travel: Lodging (#1606), all your meal receipts are labeled as Staff Travel: Meals (#1605), the flight receipt is coded to Staff Travel: Airfare (#1601).

If you want to know a total of all expenses related to a particular event (ex: Annual Brazil Conference), the finance team can attach a specific code number to your conference-related receipts. The code number is used to group all expenses from ANY accounts into a summary by relationship (Total transport+meals+lodging+conference fees, etc. for the Annual Brazil Conference).

makes sense, right?

Using the first method, the total dollar amount listed under "Conference Expense" would show the total amount spent on any conference-related expenses of the organization throughout the year. There would be no way to know the breakout of such expenses, though.

For example... (using the first method) how would we know what portion of the Conference Expenses were spent on travel versus how much was spent on the actual conference fees? and... say a total of 15 conferences were attended throughout the year by various staff members. How would you ever know the actual annual amount the organization was spending on Staff Travel-? Even if there were a category for Staff Travel, how accurate would it be if all conference-related travel was recorded in the Conference Expense account instead of in the Staff Travel account with other types of staff travel?!


If the Conference example above was too in-depth, here's a boiled down example:

When you lived in Zambia, you used to record your trips to the bank as a business expense (your travel to the bank was a business expense, because part of your job was banking!). In the old method, you charged the travel to/from the bank to "Office Expense," because you were driving to the bank as part of your office-related work responsibilities. In the natural method, you charge ALL business travel to the "Travel Expense" category-- no matter WHERE you were going or WHAT you were doing, as long as you were traveling for work.

[and, yes, this is a true-life example from some gal who used to live and bank in Zambia ;) ]



Well...
Here ends today's accounting lesson.
I hope it wasn't too painful... and that you have at least enjoyed a piece of natural (virtual) fruit if nothing else...
Have I ever told you how much I love pomegranates, mangoes, passion fruit, peaches, watermelon, apples, grapes...







PS- If the above explanations weren't helpful, perhaps this definition will make sense:

NATURAL ACCOUNTS in the Chart of Accounts are user defined accounts for the activities associated with the accounting entity that capture data at the transaction level. Natural accounts exist for a range of Assets, Liabilities, Equity accounts, Revenues, and Expenses.

...then again...