Introduction to Financial Accounting Processes

Categories of Accounting (1) Financial Accounting (FI) is concerned with recording the financial impacts of business processes (transactions) as they occur Usually external sources are interested in these outcomes Financial statements for shareholders Tax and regulatory requirements for governmental agencies

Categories of Accounting (2) Managerial Accounting (controlling) (CO) is of interest to the business itself Managerial reporting Allocation of costs and revenues Internal financial statements I’ll talk about each in turn but this lecture is about financial accounting

Background For this lecture, I assume that you have taken your core accounting classes. You should be familiar with T accounts GL / AP / AR Account categories Asset / Liability / Capital / Income / Expense Refer to my Web site link at www.middlecity.com for an accounting tutorial

Financial Accounting Tasks General Ledger Accounts Receivable Accounts Payable Asset accounting Withholding tax

Enterprise Global Settings The following are not completely in the financial accounting domain but occur prior to FI configuration Company Code Business Area Functional Area Credit Controlling Area

Organizational Data (Company Code) Financial statements are usually prepared at the company code level (US00) (DE00) for Global Bike so they can prepare financial statements for the US or German company It’s the smallest unit of financial accounting We meet the regulatory and reporting requirements of a particular country

Company Tables Table T000 stores the company codes Table T001 stores the company code / GL assignment

Organizational Data (Company Code) Use transaction OX02 (IMG)

Organizational Data (Division) A division is an OU based on sales of materials and services They are an OU for sales and distribution They are assigned to sales organizations (another OU) Global Bike has two divisions

Organizational Data (Business Area) We often need internal financial accounting across company codes (legal boundaries) A business area is an internal division of a company used for internal reporting You can create internal financial statements by business areas Use business areas to Organize (report by) product lines Organize geographically (usually reserved for business segment)

Business Area (Illustration) Global Bike has one business area (BI00) Business area 0001 is part of the default SAP installation (US 0X03)

Assignment of Business Areas to Transactions When a transaction is recorded, we post to a FI / GL account We assign the transaction to a business area or segment too This can be done manually Or automatically through automatic assignment of plant, division, sales areas, distribution channels, and cost centers

Business Area Plant Assignment We can connect a plant and division to a business area through configuration

Organizational Data (Segment) Segments are responsible for monitoring performance and profitability Similar to a business area Typically used for product line reporting Use with business areas to internally report by geography or product line Global Bike does not use segment accounting

Functional Area Used for cost-of-sales accounting Functional areas are used to classify expenses Finance, marketing, production, HR, etc.. Global Bike does not define functional areas Functional areas are implemented by means of a special purpose ledger We will not discuss them further here

Organizational Data (Credit Control Area) Defines the area of responsibility for credit monitoring (of companies) Again, the CCA can be centralized or somewhat decentralized One CCA for multiple company codes (centralized) One CCA for each company code (decentralized)

Organizational Data (Credit Control Area)

Credit Control Area (Global Bike) Define credit control area (OB45)

Credit Control Area (Global Bike) Assign credit control area – GB has one for both companies

Required FI Org Units

Financial Accounting Global Settings (STEPS) Define fiscal year Define posting periods Define field status variant Define tolerance groups Define document types and number ranges Define posting keys Assign all of the above to company code

Fiscal Year A period (usually 12 months) for which a company produced financial statements Fiscal year need not correspond to a calendar year

Fiscal Year Variants Global Bike uses K1

Fiscal Year Variants Assign fiscal year variant to company code Both Global Bike companies use the same fiscal year variant

Posting Periods A period within a fiscal year to which transactions are posted Every transaction has a posting period A posting period must be “Open” to post transactions A posting period (variant) has a beginning and an end

Posting Periods IMG posting periods (OBBO)

Posting Periods (Define Variant) Use IMG transaction OBBO Global bike used variant GL00 This is not the operating ledger GL00

Posting Periods (Open and Close) IMG transaction code OB52

Tolerance Groups Tolerance groups exist throughout SAP They define an accepted deviation from specified values The chief accountant will likely have higher tolerances than accounting clerks, for example

Tolerance Groups for Users IMG transaction code OBA4

Document Types Document types classify accounting documents The document types appears in the header record for accounting documents Document number ranges are based on the document type

Document Types (Example) The document type SA is the G/L Account Document WA is for goods issue (goods out) WE is for goods receipt (goods in) Trans code OBA7

Document Types (Example)

Posting keys A two-character numerical key that controls the entry of a line item in an accounting document Posting keys are defined by SAP but new keys can be added

Posting Keys (OB41) Posting key 40 is a G/L debit

Posting Keys

General Ledger Accounting Define chart of accounts Define account groups and number ranges Define retained earnings account Create GL master records

Financial Accounting Processes Primary Ledger General Ledger (GL) contains the primary source data used in financial reporting Subsidiary ledgers Accounts payable accounting is concerned with procurement (Chapter 4) Accounts receivable accounting is concerned with fulfillment (Chapter 5) Asset accounting is concerned with keeping track of asset acquisition, depreciation, and disposal

General Ledger Accounting (FI-GL) Provide a comprehensive view of financial accounting The GL is a COMPLETE record of all FI transactions Transactions are available in “real time” Some G/L transactions are posted manually (we’ll do that today) Some G/L transactions are posted automatically

GL Illustration

SAP GL Tables

SKB1 Company Code Segment (K) Client (K) Company Code (K) Account Number Specific company accounts For Global Bike (US00) and (DE00)

SKA1 Client Segment (SKA1) (K) Client (K) Chart of Accounts (K) Account number Balance sheet, PL, OR other account (Account Group)

SKAT It’s the GL account master record

Organizational Data (Company Code – G/L) (Options) Centralized Cross company code accounting Multiple operational chart of accounts are assigned to a group chart of accounts Decentralized One chart of accounts for each company code No cross company code accounting is possible

Accounting Master Data (COA) An ordered listing of accounts is called the Chart of Accounts (COA) This is the same COA that you are familiar with Instead of one, SAP supports up to three charts of accounts Operative Country specific Group You should be familiar with the standard numbering scheme for account types

Accounting Master Data (Operative COA) Operative (COA) – This is the primary GL Day-to-day postings are recorded here Shared by FI and CO In other words, it’s used by cost accounting Two company codes can use the same operative COA The operative COA is required

Organizational Data (Company Code) Illustration The general ledger GL00 is shared by both company code US00 and DE00

Accounting Master Data (Optional COAs) Country-specific operative (COA) – Used to meet country-specific reporting requirements Optional Additional accounts are added to the ledger to support local requirements Must be assigned to a company code! Group (COA) – Used to consolidate financial statements

COA Illustration

COA (Creating) IMG transaction OB13 (Global Bike)

Chart of Accounts (Configuring)

Account Groups An account group defines how a GL account behaves and the screens that are available

Retained Earnings Account Every P&L account is assigned to a retained earnings account At the end of a fiscal year, the P&L accounts are transferred to the corresponding retained earnings account There has to be at least one retained earnings account but there can be many

Retained Earnings Account Transaction code OB53 Global Bike has one retained earnings account

Clearing Accounts These are temporary accounts that hold data until moved to another account These are typically AR and AP accounts Subsidiary ledgers and reconciliation accounts

The Recon Account Process A/R is a reconciliation account

The Recon Account Process And it’s a recon account for customers (as opposed to vendors)

Accounts Receivable Accounting Here we are concerned with customer purchases (fulfillment) Each customer typically has a reconciliation account in the sub-ledger See Figure 3-16 on page 65

Accounts Payable Accounting A/P accounts are reconciliation accounts Transactions are automatically posted to the corresponding GL account For Global Bike, the AP reconciliation account is #300000

Accounts Payable

GL Accounting Processes Some postings are made manually Most are made as a result of a business transaction Procurement (goods receipt) / fulfillment (goods issue) SAP has rules that define how these automatic postings are performed (We will not get into those rules here but will later)

Asset Accounting Organizations (hopefully) have assets Tangible (physical) assets Intangible assets (goodwill, patents, trademarks) Financial assets (financial instruments, mortgages due, …) We will do little with asset accounting in this course

Financial Accounting Outcomes The result of GL accounting is financial statements Balance sheet Income statement (profit and loss) Statement of cash flows

Cost Centers (Using) When posting selected GL transaction, we allocate expenses (costs) to a particular cost center